- China’s latest FX adjustment is neither a “competitive devaluation” nor the opening shot in a “currency war”. Given the negative contribution of net exports to growth as of late, it is also unrelated to efforts to boost growth.
- Instead, the weakening of the exchange rate represents the unavoidable resolution of a policy conflict which saw the PBoC simultaneously tighten (to maintain the FX regime) and ease monetary policy (to combat deflation). Conveniently, it also aligns the PBoC’s tools better with market principles.
- All China has to do now is to prevent the slide from becoming disorderly. For the moment, it has ample tools to do so.
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