“A slow yuan devaluation”—is that an oxymoron? Well, not in a technical sense in that the two parts of the idea—devaluing the yuan, and doing so at a slow pace—are in and of themselves not contradictory. Chinese policymakers could certainly do it. But from the standpoint of accomplishing a policy objective (which, in this case, is de-pegging a pegged currency while not causing a severe case of outflows), the idea is as self-contradictory as it gets.
Given economic conditions in China, particularly with respect to its manufacturing sector, the Chinese economy (if not the rest of the world) could certainly benefit from a bit of devaluation. But to provide any meaningful benefit, the magnitude of such devaluation would have to approach a ballpark figure of 20%, rather than just a percentage point or two. So, a slow devaluation does not accomplish the objective of providing immediate support for a faltering economy.
From the perspective of trying to stem capital outflows, slow devaluation does not accomplish anything. If capital is looking to leave China, slow devaluation would further spook that capital out of the country but does not provide any incentives for counterflows back in. And China’s capital reserves spent on defending a slow devaluation process may eventually add up to the capital that would have left the country anyway. A better solution for Chinese policymakers would be for them to devalue the yuan to such a cheap level that new capital would then look to get back in and counteract outflows.
Therefore, I am at a total loss to figure out what exactly the yuan-fixing machinations over the last few days by the People’s Bank of China (PBOC) would accomplish.
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