China’s Double-Bind Dilemma
It is not new to our knowledge that China has been undergoing financial turmoil for— at the very least— the past month. Exports are weak, which led the People’s Bank of China (PBOC) to devalue the renminbi. Markets crashed and the global economy continues to be pulled down by China’s decline.
Chinese policymakers are left with various options to choose from; but with the slowdown in various economic sectors taking its toll on Asia’s largest economy, it seems like whichever path China opts to take is not going to be of any help.
Raising Rates
China can increase interest rates to strengthen the flagship currency and manage capital outflows at the expense of export growth. Maintaining a stable currency peg with the US dollar (USD) may guarantee better export ties with the US. However, knowing China, it would not want a long-term dependence on the US as it resolves its economic downturn on its own. Also, if China becomes completely independent in the US, it is possible that the nation will lose its glorious position in the global market.
Exerting Efforts for the Exports
If China continues to back its weakening exports by devaluing the yuan further amid dealing with large credits, the amount of capital outflows will severely hurt the already-wounded economy— far from desired recovery. With a weak currency value, the central bank can barely breathe from financial burdens acquired over the years.
China is Doomed
Further devaluation equates fatal capital outflows. Strengthening the currency value means poor export growth. There is no way out. The damages are already surfacing and affecting the global economy at large and Chinese leaders are already rattled (not to mention investors all over the world). The best possible decision that policymakers can make now is to contemplate well on the circumstances and choose the lesser evil.