Devaluation Hints at China’s Rising Distress Over Economy

Hong Kong (Aug 12)  Whenever China’s economy swooned in recent downturns, its currency never buckled. It held steady, or strengthened, even as China’s neighbors or trading partners scrambled to cut the value of their own currencies to deal with the fallout.

With the Chinese renminbi now taking its biggest plunge in decades, the worry is that the country’s already slowing economy is even worse off and the government is panicking.

By the official measures, the economy is growing at 7 percent, right in line with government targets. It is a steady pace that the leadership has indicated can support decent job growth and put more money into consumers’ pockets.

But a look below the surface shows a different, more worrisome picture.

A souvenir plate bearing the image of China's President Xi Jinping at a shop in Beijing. He is making a state visit to Washington next month.

China's central bank set the official exchange rate for the renminbi at 6.33 per dollar on Wednesday, or 1.6 percent lower than the previous day.

Core parts of the economy, like construction, are weaker than ever as the real estate industry struggles. Consumer spending, which was supposed to pick up the slack, is not that strong. And financial services, a major driver of economic growth when the stock market was booming, are slipping.

China has invested 667 million renminbi, or over $100 million, building a giant telescope in the southern province of Guizhou. Credit Reuters 

The data coming out of China, too, is somewhat suspect. Economists now wonder whether, despite official figures showing growth, some provinces and regions could be dealing with outright recessions.

“To be honest, no one has a clue where the economy is, and I don’t think that it’s properly measured,” said Viktor Szabo, a senior investment manager at Aberdeen Asset Management. “Definitely there is a slowdown. You can have an argument about what level it is, but it’s not 7 percent,” he added.

The government’s aggressive action on the currency has brought the economy into sharp focus.

China allowed the renminbi to weaken even further on Wednesday after a sharp devaluation the previous day. The currency’s official fixing against the dollar is down 3.5 percent over the last two days. On a typical day, the renminbi rises or falls just a small fraction of a percentage point.

While the government said the decision was intended to make the currency more market oriented, the devaluation was also largely a gift to exporters. In relative terms, it makes China’s shipments of clothing or electronics to consumers in the United States or Europe more affordable.

Source: NY-Times