U.S. Push for Stable Yuan May Unwind China’s Move Toward Markets
President Donald Trump may finally get to deliver on his campaign promise to address China’s management of its currency for what he has insisted is its trade advantage. But it would mean an about-face on almost a decade of global economic policy. The U.S. is said to have asked China to keep its currency stable as part of a new trade deal, a move aimed at discouraging officials in Beijing from devaluing the yuan to offset the impact of American tariffs. That request is at odds with years of global pressure on China, from the Group of 20 economies in particular, to move toward a free-floating currency. Under such a shift, China’s exchange rate and bilateral trade surplus would serve as a way to monitor that promises are being kept, with tariffs as the threat should the Chinese falter. Adopting a U.S. request to prevent big swings in the yuan’s value would turn back the clock on progress China has made in recent years toward letting the forces of supply and demand have a bigger influence on the currency’s level. “After years of asking China to become a more market-driven economy, the Trump administration would be explicitly asking the Chinese to set aside market forces when it comes to exchange-rate determination,” said Eswar Prasad, a Cornell University trade professor and former International Monetary Fund economist. “That’s a worrying precedent.” By removing the risk of a sharp yuan depreciation, the U.S. would help ensure that a trade truce between the two nations will shrink the bilateral trade imbalance, according to former U.S. Treasury official Brad Setser.
Brexit Jobs Boom Has a Flip Side That’s Holding the Economy Back
Booming employment, a rare bright spot for the British economy, also has a dark side. The country’s record-breaking job creation shown in Tuesday’s data may be coming at the cost of investment, which will hurt in the longer term. The idea is that firms are hiring people rather than buying new machinery or software because it will be easy to let them go if they need to change course. And with just over a month until Britain is due to leave the European Union and no withdrawal agreement yet secured, the risk of a jobs retrenchment is rising. The precariousness of the strong employment figures was highlighted by Japanese carmaker Honda Motor Co.’s decision on Tuesday to close its U.K. factory in 2021, leading to thousands of job losses. “Over the last several years you’ve had a slowdown in capital investment and that has actually fueled a labor boom,” said Sanjay Raja, a U.K. economist at Deutsche Bank AG in London. “In a no-deal scenario, it’s likely that we would see both investment and employment contract.” The bad news is piling up ahead of the Brexit deadline, from the collapse of regional airline Flybmi to vacuum-maker Dyson Ltd.’s decision to move its headquarters to Singapore. U.K. investment has dropped for four consecutive quarters, leading to a sharp cooling in overall growth in the fourth quarter and forecasts for the worst performance since the financial crisis in 2019. The slowdown is coming despite the lowest unemployment since the 1970s.
China’s Recession-Proof Economy Heads to a Stress Test
China bears have had a bad decade. Repeated predictions that China’s large and growing pile of debt would lead to an economic crash have been wrong so far. The country sailed through the global financial crisis. It has weathered the slowing global demand for its exports, the drying up of its excess rural labor supply, slowing coal production, and the peak and decline of its working-age population. In 2015 and 2016 it experienced the bursting of a stock-market bubble, followed by more than a year of capital flight. And though the country’s growth has slowed from an unsustainable 9 or 10 percent to a more measured 6 or 7 percent, there has been no crash, no hard landing and no collapse of what is proving to be an extraordinarily resilient political and economic system. Some China bulls attribute this impressive stability to the fact that the country’s economy is much more government-controlled than that of the U.S. or of most developed countries. As long as the ruling Chinese Communist Party carries out wise, level-headed policies, and as long as the country’s business leaders and investors continue to believe that policy will support the economy, the argument goes, a crisis of the type that afflicted the U.S. in 2008 or Japan in the early 1990s is unlikely. For example, many cite China’s ability and willingness to bail out its banks, as it did in the 1990s. As long as private-sector actors are certain that such a bailout would be forthcoming, it will be hard for a panic to begin.
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