There used to be one big currency fix for the rest of world to complain about: The Chinese yuan. Now, Switzerland and Japan have joined China in the currency-meddling club. So, the world has gone backwards, away from flee-floating exchange rates and towards greater global imbalances, threatening growth and trade.
The Swiss and Japanese interventions are understandable. Swift appreciation of their currencies has brought each to the brink of deflation, while export losses threaten recession. But, euro fear won’t go fast. Switzerland and Japan may have to adapt.
The bigger problem is that the euro’s fragility is pushing foreign exchange rates in the wrong direction. On trade grounds, the single currency ought to be strong and the dollar weaker. Exports and imports are about equal in the euro zone and Germany is running a $198-billion annual trade surplus. It is the United States which has the big trade deficit — $539 billion in the last 12 months. A weaker dollar would bolster US competitiveness and reduce its need to rack up debt with the world. The larger its debts get, the greater the risk of a disorderly disintegration of the dollar’s position as global reserve currency.
But, the risk for now is that the dollar appreciates as fearful investors flee the euro. The idea that China could help compensate by buying euro debt seems fanciful. China is reluctant to buy risky sovereign debt that private investors are rejecting.
There is a simpler and better solution. Break the big fix. A faster increase in the yuan’s value would increase imports, assisting global growth. Chinese import prices would fall, easing inflation. China’s growth would rebalance, away from still more export capacity. And, other emerging economies would be less concerned about their own rising currencies.
The Chinese trade surplus is shrinking but remains far too big and destabilising for China and the world. With Europe and the United States close to political paralysis and Japan now behaving defensively, China is the only major economy which could plausibly strike a major blow for a sounder global economy. It should do so.
