China's Currency Devaluation: End of Dollar's Hegemony?

Dipping into the coverage of what is being labeled China's "currency plunge," one finds reporting that is all over the map. For the alarmist perspective -- China's robust growth is actually an Oz-like mirage; an incipient trade war is brewing with cascading currencies devaluations -- read Neil Gough's "Devaluation Hints at China’s Rising Distress Over Economy" which appears today on the front page, upper right corner, of the NYT national edition. 

While Gough includes some helpful numbers to illustrate ebbing construction in China, the idea that the country might be headed for recession seems absurd to me; in fact, Gough undercuts it himself in his choice of a closing for the article:

As the government pumps money into the market and the broader economy, it will help, along with moves like the devaluation. It is just not clear how solid the economy will actually be. 

“It’s all about the quality of growth,” said Victor Shih, a China scholar at the University of California, San Diego. “If they want to, they can always achieve the right rate of growth.” 

The Chinese government, he added, just needs to find a group of people and “tell them to go dig a ditch.”

The Chinese government has proven repeatedly to be adept at managing its high-growth economy, something that you will not see acknowledged in the Western mainstream press. In the United States, the idea that markets can be effectively manipulated by government bureaucrats is akin to championing child molestation.

A good story to go for one-stop shopping is Neil Irwin's "Why Did China Devalue Its Currency? Two Big Reasons." Those two reasons are 1) because the Chinese renminbi is pegged to the dollar, and the dollar this year has appreciated against other currencies, the renminbi is overvalued:

The renminbi on Monday was at about the same exchange rate versus the dollar that it was in mid-December. But in that time, the dollar index was up 8.7 percent, meaning the dollar — and by extension the renminbi — was up that much against other advanced nations’ currencies, like the euro, the yen and the British pound.

And 2) China is making a play for the renminbi to be included in the basket of global reserve currencies:

China is looking to assert more of a leadership role in the global economy, and an important piece of that is establishing the renminbi as a reserve currency. The dollar and the euro have a reach and a usefulness far beyond the borders of the countries that use them, and China would like the renminbi to have a similar sway in global trade and finance, especially in Asia.

But you can’t really be a global reserve currency when you maintain all the restrictions that China insists on in the interest of keeping control of its domestic economy. The dollar wouldn’t play its central role in global finance if the American government made it illegal to exchange it for other currencies in many circumstances or used legal prohibitions and aggressive interventions to keep its value from fluctuating in response to market forces. 

In other words, China has wanted some of the diplomatic benefits it would gain if the renminbi became a more important currency abroad, without paying the price at home. 

Just last week, the International Monetary Fund said that the renminbi was not quite ready for inclusion in the basket of currencies the I.M.F. uses for “special drawing rights,” a reserve asset that currently is a mix of dollars, euros, yen and pounds. Christine Lagarde, the organization’s managing director, said China needed to make its currency more “freely usable.” And the policy change on Tuesday, by moving closer to a world in which markets determine its price, is a step in that direction.

What is being touted by some as proof of rot in the Chinese economy could actually be the moment when U.S. dollar hegemony begins its end.