Far from being a currency pariah as accused by the Trump administration, China has a shot at cementing economic leadership within Asia.
The foreign-exchange manipulator tag hastily arranged by the U.S. Treasuryis of little practical consequence. In essence, it warrants talks about talks. The same complaint in 1994 didn’t stop the immense integration of the American and Chinese economies that followed, seen in retrospect as the halcyon days of global merchandise trade. Despite noise from the current White House, China had, until Monday, held back the yuan’s decline, not encouraged it. Reverse manipulation, if you will.
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China has a strategic regional interest to show policy leadership matching its commercial footprint around Asia and more widely. This could ease the fears of some governments over economic stability. Beijing isn’t about to loosen the reins entirely, the People’s Bank of China statement indicated, this week’s move below 7 per dollar notwithstanding. Beijing needs to prevent big capital outflows.
It’s not the first time that international crisis has opened a moment of potential advantage for Beijing. Think back to the late 1990s and the Asian financial meltdown. It occurred during the strong dollar policy initiated by the Clinton administration, an era gaining not-always-deserved nostalgia amid disdain for Donald Trump’s barbs at the currency and the Federal Reserve.
There’s a case for saying the policy ended in 1998. That June, about a year after the Asian financial crisis started knocking over economies like dominoes, the U.S. sold the dollar to rescue the yen amid a crunch for banks in Japan. About two years later, America sold the dollar and bought euros to prevent the nascent common European currency failing almost before it began. Though these moves weren’t unilateral, the U.S. essentially sacrificed the strong dollar to serve as the currency guarantor to maintain international stability. Strong-ish dollar? Fine. Ever and always stronger? No, thanks.
The last thing many Asian countries needed at the time was China weakening the yuan. Beijing’s economic clout was tiny compared to now. But a weaker yuan would have piled more pressure on export-geared countries groaning under the weight of recession and the overhauls required for International Monetary Fund aid. China held firm and didn’t cheapen the yuan, which it had fixed to about 8.3 to the dollar. It was a brave move for a country dependent on exports and foreign direct investment. Holding the yuan steady gave an edge to potential competitors.
What if China had weakened its currency? Monday’s moves in Asian markets after the yuan dipped below 7 to the dollar are instructive: The Korean won slipped below 1,200 to the dollar for the first time since January 2017, Indonesia’s rupiah fell despite intervention from the central bank, the Malaysian ringgit dipped to a six-week low. The Philippine peso and Taiwan dollar also came under pressure.
China reaped kudos during the Asian crisis and can again. Few people then were handicapping the year China’s gross domestic product would exceed America’s. A greater policy leadership role from Beijing makes sense. It wouldn’t be cost free; China will seek something in return, in terms of economic or strategic concessions in Asia.
But say this for China: It tends not to upend decades-long practices or notions of international relations via Twitter. In the 1990s, China was a friend to Asia but already a competitive threat. The neighbors learned to live with it. Meanwhile, the dollar looks shopworn and Trump has raised concerns about America’s commitment as a stabilizing Pacific power.
The U.S. monetary and financial system anchored the post-1945 era and in many ways still does. But it’s lost the sense of infallibility it still enjoyed in the post-Cold War 1990s. That didn’t start with Trump. Even during Bill Clinton’s presidency, the importance of a rising China’s stability was part of the picture.
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When Treasury Secretary Robert Rubin sold dollars in June 1998, the immediate objective was to assist Japan. It’s worth remembering, though, that Clinton would shortly embark on a nine-day visit to China. The last thing he wanted was for that trip to be dominated by a devaluation of the yuan in response to a careening yen, rather than a victory lap for global engagement.
China emerged as the biggest winner from the 1990s crisis. Globalization was still seen as the natural state of affairs, in hand with the Washington Consensus. It’s a different world. Beijing’s economic, political and strategic clout are exponentially bigger; the West and its systems no longer command default deference.
Beijing has a lot to play for. Being an adult with its currency would be a strong start.