China’s Mixed Motives in Devaluing Its Currency
PIIE President Adam Posen, in an interview with the Japanese newspaper Nikkei, says the People’s Bank of China’s (PBoC) decision to let the renminbi depreciate could be motivated by China’s desire to include it in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket. China may also be acting to prevent the economy from declining further.
On the one hand, Chinese leaders may want the renminbi to depreciate in order to prop up exports. On the other, the PBoC is trying to cast the depreciation as driven by market liberalization. The huge interventions in the stock market last month contribute to the narrative that the Chinese economy is worse than many experts thought.
The latest Chinese moves are not likely to change the US Federal Reserve’s plans to raise interest rates soon, Posen says. But if devaluation reaches more than 20 percent, the Federal Reserve could slow its interest rate plans.