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What does the yuan’s decline mean for the U.S.?

August 11, 2015 at 6:40 PM EDT
What does a weaker yuan mean for China and the global economy? Greg Ip of The Wall Street Journal and Orville Schell of the Asia Society join Judy Woodruff to discuss the economic and geopolitical factors.
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JUDY WOODRUFF: We take a closer look at the move with Greg Ip, chief economics commentator for The Wall Street Journal, and Orville Schell, director of the center on U.S.-China relations at the Asia Society.

And we welcome both of you.

Greg Ip, why is China doing this?

GREG IP, The Wall Street Journal: I think there are a couple reasons.

The first one is that the Chinese economy is slowing. Its growth rate has dropped to 7 percent this year. Now, a country like the United States would kill for a 7 percent growth rate, but historically that’s actually rather weak for China, and given the problems we know that exist with Chinese data, it may be that the economy is actually growing even more slowly than that.

And the recent numbers show that exports in particular have really fallen quite hard. So, a natural response for that is for a country to lower the value of its currency and hopes that that boosts the performance of exports in other countries.

JUDY WOODRUFF: Now, the Chinese government put out a statement. They mentioned the growth rate, but they also talked about wanting to go along — fit with market-based fluctuations in currencies as well. What’s that part of this?

GREG IP: That’s a very important aspect of this announcement, because historically, in most countries, like the United States or Europe, the exchange rate is pushed up or down by market forces of supply and demand.

Not in China. In China, the government says what they want the exchange rate to be, and the market is expected to follow. And for years, the United States and the International Monetary Fund have said, China, to be a modern economy, you must allow market forces to hold sway. That’s what China said yesterday.

They said, from now on, we’re going to allow the market to tell us which direction the exchange rate should go. It’s just happens, in this circumstance, they — the market is telling us it should go down. but it will take time to see if China stands by that commitment, for example, at times when the market wants the exchange rate to go up.

JUDY WOODRUFF: So, Orville Schell, what would you add to that? What more is going on that would explain what China has done?

ORVILLE SCHELL, Asia Society: Well, I think we see sort of embedded within the Chinese economic system this extraordinary contradiction.

I mean, remember, it’s half hybrid capitalist market-driven and half centrally controlled command economy. So, we see these state decisions that happen quite often. We saw them just in the stock market crash, where the government intervened to artificially prop up the price of shares.

And here we see the government really determining what its currency should be worth on the international market, rather than allowing it to spontaneously happen according to market forces. And the dilemma here is that Xi Jinping, by his own admission, has said the key element — a key element in his reform program is to allow the market to determine the allocation of resources.

But here we see the state intruding again in a way which falsely manipulates the value of their currency. And this sort of heightens the degree to which we can see that the Chinese economy is on the horns of a dilemma, a real contradiction, sort of half of this and half of that.

JUDY WOODRUFF: Orville Schell, you were telling us earlier today that this also tells how much stress the Chinese government is under just over its legitimacy. What did you mean by that?

ORVILLE SCHELL: Well, the Chinese Communist Party doesn’t really have an ideology anymore. The basis of its legitimacy is by and large its economic performance ability.

Lately, we have seen a number of big hits on that, that legitimization. Namely, we have seen slower growth rates, 7 percent, probably a lot lower. We have seen a housing bubble. Then we had the stock market crash. And now we have flagging exports.

So at the same time they want to increase consumption at home and diminishing the need to rely on exports, they’re stimulating exports by lowering the cost of their currency. So this again sort of puts everything at the doorstep of the government. If they succeed, they succeed. But if these measures fail, then the government takes another hit at its legitimacy.

JUDY WOODRUFF: Meanwhile, Greg Ip, the rest of the world is watching. There was a lot of reaction today. What do you see the impact on the United States?

GREG IP: Well, it will partly depend on whether other countries feel that, to compete with China, they too have to lower their currencies.

But assume for a moment that they don’t. The United States lost millions of jobs over the last two decades as trade with China expanded. That process is largely over. The decline in the yuan in the last day is too small to make a big difference to the U.S. economy. It will make imports a little bit cheaper, so maybe that keeps inflation a bit lower, but I think the impact on the U.S. economy will be very, very small.

JUDY WOODRUFF: So if you’re a U.S. consumer, what do you look to happen?

GREG IP: Well, possibly some of the imports that you buy, the things that we know are made in China, like clothing and toys and many other products, might be a little bit cheaper.

I think the bigger issue though will really be political. I think this is a big problem for Barack Obama as he seeks to get the Trans-Pacific Partnership confirmed, completed, because, as you know, there are a lot of people in Congress who wanted precisely this sort of activity prohibited, currency manipulation prohibited, by that agreement. The administration resisted that.

JUDY WOODRUFF: And we saw a leading member of Congress saying today that they may look for ways to penalize Chinese as a result of what they did.

Orville Schell, so what’s at stake here for the Chinese government? What has to happen for them to come out of this feeling stronger, or what are they worried about?

ORVILLE SCHELL: Well, they find themselves sort of hoisted on their own petard.

They’re in effect being — becoming responsible for more and more aspects of an economy, which they could have just stood aside and said, well, we’re going to let the market determine value, and this is the future, this is where we’re headed. I think the problem is that there is going to be political fallout.

We’re in a presidential election here. Moreover, President Xi Jinping from China is coming in September for a summit with Obama, and there’s so many issues now dividing the country, that to have one more sort of thrown on the fire is going to make it doubly difficult for them to, for instance, come to some agreement on global climate change issues and things like that.

Could be that climate change will be our saving grace, that this is an area where we can agree on, where we do have a common interest. We will have to wait and see.

JUDY WOODRUFF: And, Greg Ip, you mentioned pressure, now additional pressure on the president. What are his options? And I saw speculation today that said maybe this means the Federal Reserve might delay raising interest rates in the fall. How do you see that?

GREG IP: There is that possibility.

But given that the change in the exchange rate is so tiny and it only affects right now trade with China, I don’t think it will have a big enough impact on overall inflation to affect the Federal Reserve’s decision one way or the other.

I think the United States, we have seen for the Obama administration, they got a little bit of what they wanted, because they have long asked China to make the exchange rate more market-determined. And then they lost a little bit of what they wanted, because the exchange rate went in the opposite direction.

JUDY WOODRUFF: It went in the wrong direction. Yes.

GREG IP: I think the burden on them is what they’re going to say is, we’re going to take a wait-and-see attitude right now. They have long resisted all these calls from Congress to brand China a currency manipulator, out of the view that that would just cause more problems and that they could use quiet pressure instead.

I think that their hope will be that the Chinese are sincere and that when the markets start to push the exchange rate up, that will be allowed to happen. It’s going to be a wait-and-see process.

JUDY WOODRUFF: Greg Ip, Orville Schell, we thank you both.

GREG IP: Thank you.

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