As Global Markets Rattle, Is China Shifting Economic Policy?

But what's politically interesting here is that as the "nationalists" are calling for dumping U.S. debt and wondering why China holds so many "worthless U.S. assets," the liberal economists are agreeing with them, albeit with very different motives. This marriage of convenience, regardless of how ephemeral, may produce some interesting outcomes. People like Yu and Xia are arguing that if you want to limit China's exposure to U.S. assets, then Beijing has to look itself in the mirror and tackle longstanding export-oriented policies that have only exacerbated this reliance.

Will Beijing then simply decide to float its currency and whittle down its current account surplus? Unlikely and certainly not rapidly. But is this apparently concerted push by economists, who have shrouded the necessary reforms in nationalist clothing, having an impact? Probably and modestly. In the annals of imperfect analogies, think of it as if "green-minded" liberals adopted a national security platform to argue that the U.S. needs a comprehensive clean energy policy to wean off Saudi oil that funds terrorist cells and therefore compromises U.S. security. It's like if Rachel Maddow and Michele Bachmann both agreed that raising taxes on the wealthy is sound economic policy.    

Indeed, there is already plenty of speculation over whether changes in China's currency policy are afoot.

In the past three weeks, China has come tantalizingly close to signaling some sort of a policy shift. The PBOC has fixed the yuan mid-point at a series of record highs, and did so yet again on Monday.

A flurry of articles and editorials in government-controlled newspapers have argued that the time is right for faster appreciation.

But just when investors and economists smelled a change, the PBOC stepped back and let the yuan drift sideways for a week. Reuters spoke with several analysts at Chinese government think-tanks, who said expectations of a big move were misplaced.

Liang Youcai, senior economist at the State Information Center, said a sharp yuan rise could backfire by attracting more investment money into China, worsening the inflation pressures that the PBOC wants to counter.

Still, the yuan has risen about 0.8 percent against the dollar so far this month. That may sound modest, but considering it rose just 2.3 percent over the first seven months of the year combined, it shows Beijing has stepped up the pace even though growth concerns have intensified.

Not only is the RMB appreciating against the U.S. dollar on nominal terms, it is apparently also rising on a trade-weighted basis against other currencies, something Beijing has been reluctant to do in the past (and politically, the dollar-yuan exchange rate has been the consistent focus). This is an interesting change from the global financial crisis, when China immediately re-pegged its currency to the U.S. dollar.

The unintended political alignment of the two interests in China is probably not going to endure, in large part because Chinese politics have become so pluralistic and interest-driven. It seems to be a constantly negotiated game where a temporary upper hand assures nothing in the long term. And it bears repeating for the umpteenth time that regardless of the modest steps that Beijing seems to be taking in the right direction, its policies are still restrained by accumulating an obscene amount of U.S. debt. There is no magic solution and the ultimate re-balancing process will take substantial coordination and years or decades to realize. In the meantime, slow and steady management to minimize volatile impact seems to be the Chinese way these days.

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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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