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China Rejects Devaluation, Opts for Fiscal Stimulus

Debate intensifies over yuan devaluation amid China's economic challenges, with a shift towards fiscal stimulus over monetary measures.

By Athena Xu

5/15, 11:51 EDT

Key Takeaway

  • Despite economic pressures, a significant devaluation of the yuan is deemed counterproductive for China, given its strong export performance.
  • China is considering big fiscal stimulus over monetary measures to boost domestic consumption and reduce reliance on exports.
  • The effectiveness of proposed state interventions in the housing market and broader fiscal measures to address China's economic challenges remains uncertain.

Yuan Devaluation Debate

The discussion around the potential devaluation of the Chinese yuan is intensifying amid China's economic challenges. Bloomberg's Ye Xie, referencing colleague Ven Ram, argues that a significant devaluation of the yuan would be counterproductive for China. Despite pressures, China's exports have been performing strongly, with complaints from the US and EU about the influx of cheap Chinese imports highlighting this success. Brad Setser of the Council on Foreign Relations notes that China's manufacturing surplus is larger than that of Japan and Germany combined, even as the market share of Chinese exports has slightly declined from its pandemic peak. The real-effective exchange rate of the yuan is at its lowest in a decade, suggesting that Chinese manufacturers remain competitive internationally without the need for further devaluation.

Fiscal Stimulus Over Monetary Measures

The argument shifts towards the necessity of a big fiscal stimulus to boost domestic consumption and pivot China's growth model away from reliance on exports and investment. This strategy implies a need for a stronger yuan to facilitate such a shift. Ven Ram's analysis highlights China's consideration of state intervention in the housing market, with plans for state-owned enterprises to purchase unsold homes from distressed developers. This move aims to transfer liabilities onto the government's balance sheet, potentially improving the financial outlook of property firms and reviving sentiment towards domestic stocks. However, Ram suggests that fiscal measures alone may not suffice to rejuvenate China's ailing economy, hinting at the complexity of China's economic predicament.

Economic Challenges and Currency Pressure

China faces significant economic challenges, with the property sector slump and shifts in global supply chains necessitating a comprehensive solution that extends beyond fiscal initiatives. The offshore yuan is under pressure, with market participants possibly underestimating the risk of a necessary devaluation. The proposed state intervention in the housing market, aimed at converting unsold homes into affordable housing, reflects an attempt to stabilize the market. However, the effectiveness of these measures in addressing the broader economic issues remains to be seen, as the property sector and exports are crucial to China's economy.

Street Views

  • Brad Setser, Council on Foreign Relations (Neutral on China's manufacturing surplus):

    "China’s manufacturing surplus is actually bigger than the peaks of Japan and Germany -- the two manufacturing powerhouses -- combined."