China has recently been devaluing its currency to boost its exports. Some think it will go on doing so bit by bit until it settles ten per cent lower than its peak. The fact that it is happening at all causes word wide consternation, because since globalisation it is the currency markets, not governments, which set the level. But not in China, whose government has retained close control of the currency during its meteoric rise to become the second largest ( by some measures the largest) economy in the world. This fact alone demonstrates the disadvantage of market valuation, because China’s control of its own valuation a key to its rise to economic mega power.
One of the reasons for the world’s fluster is that it is unclear how to react. If China reduces the prices of its goods by devaluing, it will make western goods more expensive in China and reduce trade. But if China slows and its own consumption goes down, that will also reduce trade expressed in western exports into China. So the West faces not a win win, but a lose lose. Broadly this blog takes the view that the stronger the Chinese economy the better, even if in the short term we are disadvantaged.
The particular problem Britain faces is that its attempt to rebalance its economy in favour of exports and manufacturing has failed and will continue to do so because sterling is valued much too high. The only way a government can influence the value of its floating currency is with interest rates. Reduce the rate and you devalue the currency. But with interest rates at .25% there is nowhere down to go. So if the pound rises, there is nothing the government can do about it. That is another reason why this blog believes rates should have risen long ago, because we are headed to a point where they might need to fall.