The real weakness of the Chinese economy hidden behind the devaluation of the renminbi

In September 1992, the biggest event in the history of money was the sterling crisis.

George Soros, who is the world's largest hedge fund as a private investor, has smashed the pound and smashed the Bank of England, the UK's central bank, which is busy with acquisitions.

At that time, in order to achieve a unified currency, the euro, Europe had implemented special measures (European exchange rate mechanism, ERM). ERM is a moderately fixed exchange rate system, and Soros believes that the pound has exceeded its due strength and is madly suppressed.

The defeated Britain withdrew from ERM and soon switched to a floating exchange rate system. The famous event that this market has beaten the government is because the author has recently been thinking about the status quo of China and its currency, the renminbi, which has been stirring the world economy since the beginning of the year.

China’s foreign exchange regulatory authorities that are beginning to move closer to the market


Starting from the impact of 8.11, the RMB has depreciated the change of the US dollar against the RMB exchange rate.

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"With the current scale, if the Chinese government continues to intervene in the exchange rate, China’s foreign exchange reserves may be reduced to 1 trillion US dollars in about three or four years. At that time, it is not surprising that the renminbi has a crisis like the original British pound."

Daisuke Tang Yu, chief market economist of Mizuho Bank of Japan, made such a "magic" prediction. China does not implement a free floating exchange rate system that determines the exchange rate by the market like Japan and the United States. Instead, the foreign exchange regulatory authorities issue a median price at 9:00 am on each working day. The exchange rate only floats within a certain range around the middle price. Manage the floating exchange rate system. Its purpose is to control the floating within a certain range and reduce the impact of the dramatic changes in the market on the economy. Foreign exchange reserves held by the government are used for foreign exchange interventions such as selling dollars and buying renminbi.

From this move of the renminbi, it can be seen that the current economic stagnation in China is different in nature from the past.

8.11 Impact means that on August 11, 2015, China suddenly changed its exchange rate management method. Previously, China decided to determine the median price "independent" depending on the exchange rate of the actual market transactions. However, on this day, China announced that it would "determine the median price by referring to the exchange rate of the interbank foreign exchange market (market exchange rate) on the previous day, taking into account changes in the exchange rate of major international currencies." Although the managed floating exchange rate system, which only floats within a certain range, remains unchanged, the decision of the middle price follows the actual situation of the market. Since that day, China has lowered the median price for three consecutive days, and the RMB exchange rate has fallen sharply.

China, which has always been "going its own way", has begun to move closer to the market for two reasons. One is the loss of foreign capital. "Investing in China's stock market and various types of assets (speculative) hot money, as well as investment in physical assets, etc., were withdrawn from the home country" (Kelong, chief researcher at Fujitsu Research Institute).

Behind the loss of capital may be the vigilance of slowing economic growth and dissatisfaction with the planned economic system in various markets such as stocks and foreign exchange.

Taking advantage of low labor costs, light industries such as fiber, which is dominated by human tactics, lost competitiveness as wages rose and the renminbi appreciated. Some factories began to move to countries such as Vietnam and Cambodia. On the other hand, the "three surpluses" of equipment, debt and over-investment faced by major industries such as steel, shipbuilding and automobiles have once again been criticized. It has been pointed out that the center of "excess" is state-owned enterprises and joint ventures between state-owned enterprises and foreign capital. As long as they are under the socialist government, they cannot solve the problem of surplus.


The essence of the three surpluses is the crisis of state-owned enterprises

The problem of state-owned enterprises is also the epitome of China's economic contradictions. In the manufacturing sector, steel, flat glass, cement, non-ferrous metals, shipbuilding, coal, and aluminum are the pillars of state-owned enterprises. The output has reached the world's number one automotive industry, and its core is also a joint venture with Toyota, Nissan, the US Big Three and the German Volkswagen.

Some people believe that these "excess" caused by state-owned enterprises and local governments and state-owned banks have been increasing. State-owned banks have over-financed state-owned enterprises, while local governments create jobs through public works. Even for companies with poor performance, they also provide loans and tax cuts to extend their life. This has led to an increase in zombie businesses.

Production is the same. "The Chinese account for about 13% of the world's GDP (2013), but the ratio of manufacturing alone has reached 23.2%," said Sanzo Yukiro, a senior researcher at the Nisshin Foundation Research Institute. The difference between the two means that there is a possibility of overcapacity in the manufacturing industry. For this reason, the oversupply of steel has been severely criticized by the fact that "low-cost exports have led to deflation and expansion to the world."

But the more serious problem is the lack of capacity of the central and local governments and state-owned enterprises themselves to reform. Reducing "excess" capacity has the potential to reduce employment and social instability. Because the "policy may have failed" (three tails), the reform did not go all out.

The second reason for the exchange rate sector to move closer to the market is considered to be the manipulation of the devaluation of the renminbi. The depreciation of the renminbi certainly means that the dollar appreciates, the same as the appreciation of the yen. This is the easiest way to recover the manufacturing competitiveness lost due to rising labor costs and other reasons. This intention can be seen from the devaluation of the RMB that has gradually increased after the 8.11 shock.

There is another underlying reason for the "excess" problem that has erupted at the center of state-owned enterprises. That is, "there is insufficient innovation ability to set off technological innovation and improve production efficiency" (Kelong). China may encounter obstacles in emerging market countries that rely on low labor and investment costs to a certain extent, namely the “middle income trap”.

The market began to feel worried about China, which is different from the external factors in the fall of the Lehman crisis in the fall of 2008 and the cyclical economic recession.