Let’s hope Xi resists this urge. It’s not hard to count the ways such a move could backfire on the global economy in the short term and China’s development in the long run. The biggest is triggering the worst currency war in decades, which would slam bond and stock markets everywhere.

Consider why Xi and the People’s Bank of China have so far avoided yuan depreciation. For one, it would make offshore debt payments more expensive for giant property developers like China Evergrande Group, increasing the odds of a default. It would set back efforts to increase trust in the yuan and its internationalisation. And it would make Donald Trump’s head explode.
This latter risk looms large in Beijing. The party line is that proud, rising China bows to no one and that Xi’s Communist Party will act as it pleases. In reality, Xi’s inner circle wants to avoid becoming a central topic in America’s coming presidential election.

02:42

Japanese monetary authorities mull intervention options after yen drops to 34-year low

Japanese monetary authorities mull intervention options after yen drops to 34-year low

Nothing brings together US President Joe Biden’s Democrats and the Republicans loyal to his predecessor, Trump, faster than being tough on China. Just look at the speed with which Congress acted to clamp down on ByteDance-owned TikTok. China is already a big talking point on the campaign trail as Biden and Trump talk trade, wages and security.

A weaker yuan would turn even more of Capitol Hill’s attention Beijing’s way, and in ways that pull Japan into the fray, too.

As Xi absorbs the implications of what Biden and Japanese Prime Minister Fumio Kishida discussed in Washington last week, he might be most vexed about what they didn’t: a plunging yen.
How could the US label China a currency “manipulator” when ally Japan is an even bigger offender? Beijing would have reason to scream “hypocrisy!” early and often – and without irony.
Already, Trump is threatening 60 per cent tariffs on all mainland Chinese goods. He plans to revoke China’s “most favoured nation” trade status. Elon Musk is lobbying hard for tariffs on electric vehicle imports. The Tesla founder argues that BYD and its mainland peers will “demolish” US carmakers. Trump will almost certainly oblige.

A pivot towards a weaker yuan might have Trump and Biden vying to go one better on punishing China’s beggar-thy-neighbour gambit. Yet the bigger risk is that it could trigger devaluation moves across Asia and beyond.

Policymakers from Bangkok to Washington have feared a moment like this for a quarter of a century now. At the height of the 1997 Asian financial crisis, the biggest worry was China entering the race to the bottom.

Back then, officials at the US Treasury and International Monetary Fund practically begged China not to devalue, as Indonesia, South Korea and Thailand had done. The fear was that a yuan devaluation would cause a dangerous domino effect. And that the economies that had avoided the worst of the crisis – like Malaysia and the Philippines – would fall next.

That didn’t happen, thankfully. But China’s economy circa 1997 wasn’t facing the daunting challenges it does today.

China’s property stumble echoes Japan’s bad-loan debacle in the 1990s. Just as with Japan, it is generating deflationary pressures that Beijing is struggling to address.

16:50

Can China learn lessons from Japan’s ‘lost 30 years’?

Can China learn lessons from Japan’s ‘lost 30 years’?

Naturally, many economists worry that China is failing to heed the lessons of Japan’s lost decades – namely, acting quickly and with overwhelming force to dispose of bad assets. Xi’s team has been very slow to cleanse property developers’ balance sheets and tackle trillions of dollars of local government debt excesses.

This gets at why a weaker yuan would hurt China’s economic development in the longer term.

If currency devaluation were a ladder to vast riches, Argentina and Turkey would be Group of Seven nations. Despite the yen’s over 14 per cent drop over the past year, Japan’s economy is barely growing. In February, household spending fell for a 12th consecutive month.

Tokyo spent the past 25 years prioritising a weak yen over structural reforms. This took the onus off all the past 12 Japanese governments since 1998 to cut bureaucracy, modernise labour markets, catalyse a start-up boom, increase productivity and empower women. It deadened the urgency for corporate CEOs to restructure, innovate and take risks.

China must go the other way. Here, it’s worth rolling out the cliché that China risks getting old before it gets rich. Wealthy, highly developed Japan chose homeostasis over disruption. China’s unbalanced economy doesn’t have the luxury of relying on massive corporate welfare – which is what an artificially undervalued currency is – for growth. It’s a recipe for mediocrity, less productive industries and more boom/bust cycles.

With any luck, Xi’s inner circle is studying these lessons very closely and planning to hold the line on exchange rates. Japan isn’t making it easy though, as the yen ticks lower.

Kishida’s team would be wise to guide the yen higher, even just modestly. It would calm nerves in Beijing and head off the risk of a currency war that would upend an already fragile global economy. And it would perhaps finally close the books on the 1990s, a time few in Asia want to revisit.

William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”



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