- First, China has signalled that it is prepared to let its renminbi weaken, giving up a long-standing policy of actively shoring up the renminbi at stronger than 7 to the US dollar. So, the renminbi will be more volatile henceforth. But it is also more likely to depreciate over time, as China’s large current account surpluses are now a thing of the past. While China is unlikely to suffer a serious current account deficit, the surpluses will be small and will no longer support the renminbi. A weaker renminbi also helps to offset the higher tariffs that the US has imposed on China — but it puts downward pressure on Asian currencies.
- Second, the weaker global economy is hurting the more vulnerable emerging economies whose currencies have been depreciating. The most dramatic example is the Argentinian peso, which has lost a third of its value this year. Should things get worse in the world economy, other vulnerable currencies that have held up so far, such as the Turkish lira, could fall as well. As more emerging economies cut interest rates, their currencies could also edge down. Such currency concerns have an impact on Asia — they will limit Asian central banks’ freedom of manoeuvre in reducing interest rates to support economic growth.
- The trouble is that these monetary responses do little to thwart the fundamental loss of business confidence caused by the trade wars, China’s economic deceleration and impossible-to-predict geopolitical risks such as the imminent Brexit or slow-burning crises such as the Middle East and Hong Kong’s protests.
- Moreover, monetary policy seems to be less and less effective. In China, despite all the measures that the authorities have tried, the economy continues to slow. Over the past few years, China has needed stronger and stronger monetary growth to achieve a given growth rate. Similarly in the US, the evidence seems to show that each bout of quantitative easing had less and less effect.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy