Liberalization of the Chinese market place means less central government control over it, says Economist Zhun Xu
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore. China has devalued its currency, known as the yuan, for a third consecutive day as of August 13. Its depreciation against the dollar will increase the supply of yuan in foreign exchange markets and lower the cost of buying Chinese exports for other countries. The business press in the U.S. and Europe is saying investors are worried that this is a signal of a stalling Chinese economy and an attempt to raise the yuan as a global reserve currency, which is currently the fifth most internationally used currency. The U.S. is also worried that this will have a ripple effect in slowing down the U.S. economy that is currently experiencing some growth. Joining us now to clarify what is happening is Zhun Xu. He has been teaching political economy at Renmin University in Beijing since 2012, and is now joining the Department of Economics at Howard University. Zhun, thank you so much for joining us today. ZHUN XU, HOWARD UNIVERSITY: Thank you very much for having me, Sharmini. PERIES: So let’s begin by how the devaluing of the yuan will be experienced in the Chinese market itself. XU: Well, in general a market’s height uncertainty and surprise, especially when it involves a [big] and influential economy like China, and if we put in historical context the Chinese currency or yuan or [r and b] has been mostly appreciating against U.S. dollars during the last ten years by about 30 percent. Even during, like, Asian economic crisis in 1997 or the recent crisis in 2008, the Chinese government did not really depreciate its currency. So when it depreciated the currency the other day by 2 percent, that’s very unprecedented, given that the whole economy is slowing down and actually is decreasing very rapidly recently. We had a stock market crash not very long ago. Everything makes people worry about the future of the Chinese economy. PERIES: Zhun, what is prompting the central bank to devalue the currency right now, at this time? XU: Well, the direct reason according to the central bank of China, PBOC, that they changed the rule of making the [meet] so called the meet market price. Every day the PBOC would give a suggested price of the Chinese currency, this exchange rate. And the daily fluctuation of the actual market price would not exceed 2 percent of that given price. Right, go ahead. PERIES: No, go ahead. I want you to finish your thought. XU: Right. The PBOC recently changed the rules so that it incorporates more of market information in making this meet market price. So given that during the last several months the actual market price is always lower than the official meet market price. So once it removes this kind of regulation, the meet market price starts depreciating. So that’s the actual closing market price. PERIES: And why is this such a concern to other countries and the U.S. in particular? This is really going to mean that Chinese goods are even cheaper than they already are. XU: It may be beneficial to some customers. Some firms in China and also in the US. But not necessarily to most of us. Many commodities already are on a contract price which is not going to be hugely affected by this small depreciation. Plus, the scale, the magnitude of this Chinese currency depreciation is not a, it’s not very large compared to international standards. It’s just–so during the last three days, it depreciates about 4 or 5 percent. It’s not a very huge amount, really. I mean, it’s just very surprising compared to the Chinese context. PERIES: And why are the currency speculators worried about this, and pitching this in terms of a currency war between the U.S. dollar and the yuan? XU: There have been many people talking about possible currency war. Not only between Chinese currency or the U.S. dollars, but also among developing countries in general. I think that’s–it’s very unlikely that China will step into a real currency war among the other countries. To explain it we have to go back to what are the actual, the factors associated with this sudden [accentuated] change. So there’s one possibility, that the Chinese government wants to encourage its export sector by making their commodities cheaper. Lower, depreciate the currency. But the point is the old model, the old export-oriented model, has already been proven that it’s environmentally and economically unsustainable. So China is not going to simply go back to that old model. Also, the global demand is not very strong right now. And Chinese government and Chinese central bank has been repeatedly saying that they have no interest in going into currency wars with other countries. It’s not going to do any good to China itself. Plus, even China wants to go back to the same, or the old model. The cheap commodity model. It’s very likely that they cannot do this because during the last ten years, the cost of labor, the wages, average wages have been increasing more than ten percent per year. If that trend continues, with the increasing cost of resources, and China–I mean, the model of producing and exporting extremely cheap material and goods is not going to be able to be achieved in the medium term. So I think it’s, we have–it’s possible, but the possibility is very low to see a currency war between China and other countries. PERIES: Now Zhun, people speculate that of course the Chinese economy has been slowing down, and this is a way for the central bank to try to stimulate the economy by devaluating the yuan. Is that true? And if so, what impact does this have on local economy and workers in particular? XU: Yes. I think there is definitely an element of the consideration that the central bank wants to boost the Chinese economy by depreciating the currency. But not so much via exports. I think the current plan of the government is to bring the Chinese currency, the yuan, as one of the global currencies. Join the Special Drawing Rights group, SDR, of the IMF. They expect this would bring new capital inflow or encourage capital investment in other parts of the world by the Chinese firms and bring many other benefits. Not only economically but also diplomatically. And this so-called depreciation, or the more market-determined exchange rate formation, is one of the conditions for joining SDR. So I think that’s partly a response to the IMF request, Chinese currency reform. But I think, I mean, the actual impact of that, even with the Chinese currency joining the SDR, the actual impact would be limited on the Chinese economy. Because by joining SDR, that’s equivalent–. PERIES: Just describe what SDR is for our viewers. XU: Right. It’s another way of saying it’s a global reserve currency. It’s like the U.S. dollar, the euro, the pound, and also the yen. The commonly accepted special currency by other governments. But even, in order to achieve this status, China needs to open up its capital [count] by so-called liberalizing the capital control, deregulating the capital market. That’s the prerequisite of joining this elite group of currencies. PERIES: And the idea is that the state will also make some money in terms of the exchange rates, and so on–. XU: That’s right. PERIES: If the yuan is used more in terms of global capital exchanges. XU: Yes. Yes, so politically it’s always a very good thing to say that, oh, I make the Chinese currency one of the global currencies. It sounds very good. But the fact is once you make that, the so-called liberalizing capital [count] also puts China under more risk and more fluctuation than before, because you have much less capital control than before. And basically, one of the experiences, one of the lessons of the Chinese growth story during the last three decades, is that China always maintained a very strong capital control, so China didn’t really have a big financial presence. So by doing this, a Chinese government also loses the capacity of implementing any alternative policies other than neoliberalism. Because now with less capital control, it’s very hard to do anything different from other countries. So I think eventually it will not be beneficial for the Chinese workers or the Chinese people, Chinese economy in general. PERIES: Zhun Xu, thank you so much for joining us today, and we look forward to having you back. XU: Thank you very much. PERIES: And thank you for joining us on the Real News Network.
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