Nachum Kaplan, IFR Asia Pacific Bureau Chief
Not satisfied with budget negotiations that brought the nation to the brink of a sovereign default, some of them now want to inflict economic damage on the world’s most important emerging market, one of the few remaining drivers of global growth.
The timing of such a move could not be worse. As far as the world economy is concerned, it would be akin to pouring water on a drowning man. The implications are bad globally, and especially so for Asian states that have fought hard – and so far successfully – to keep their economies out of the quicksand that is dragging down the US and Europe.
The renminbi probably is undervalued, but by nowhere near the extent that the US’ innumerate legislators claimPlenty of problems threaten the global economy – from Europe’s sovereign debt crisis, the need for better-capitalised banks, rising unemployment and the prospects of a double-dip recession in the US. Seeking at such a time to drag down China, and by extension the rest of Asia, seems an especially dangerous and foolhardy proposal, and puts US lawmakers among the biggest threats to the already teetering world economy.
The good news is that the bill is unlikely to succeed. It may not even make it to the floor of the US legislature as wiser and cooler heads on both sides of US politics prevail. However, the move does show the danger of rising protectionist sentiment and Asia’s export-driven economies are particularly vulnerable to it.
The renminbi probably is undervalued, but by nowhere near the extent that the US’ innumerate legislators claim (and rapidly rising wages in response to surging inflation in China are negating the effect of that with each passing month). This is a long-standing issue, but imposing punitive measures on China right now is out-rightly stupid.
Investors fond of doomsday scenarios spend their nights fretting over the implications of a Chinese crash and now these legislators are proposing something that could turn those nightmares into reality.
China, despite its impressive headline growth rate, faces plenty of economic problems of its own, with a huge debt mountain, a bubbly property sector facing a refinancing crunch, and worrying levels of inflation. By far the biggest threat to its economy, however, is that demand from its key US and European export markets could dry up as their economies continue to stutter.
What would punitive measures from the US do (or even a stronger renminbi if US legislators got what they wanted for that matter?) It would make Chinese exports less competitive at a time when its export markets are already struggling. In other words, it would slow Chinese growth at a time when keeping the Chinese economy growing is critical for a global recovery... read more>>
