China Exporting Global Deflation? Deutsche Bank Says Not Quite

  • Yuan must drop 25% for a 'measurable impact on U.S. inflation'
  • Slok says Chinese wage increases mean cheaper yuan makes sense

Deflation across China’s economy worsened last year, coinciding with a decline in its currency to near a five-year low. Does that mean the world’s second-largest economy is exporting deflation? Maybe not, according to Deutsche Bank AG.

An economy-wide inflation reading slipped to minus 0.5 percentage point last year, according to a Bloomberg gauge, while the yuan has dropped 6 percent against the U.S. dollar since a surprise devaluation by China’s central bank in early August.

Even so, that’s not necessarily a harbinger of global deflationary pressure, according to Torsten Slok, the chief international economist at Deutsche Bank in New York.

"We need to see a dramatic depreciation of the RMB of 25 percent or more before it would begin to have a measurable impact on U.S. inflation," Slok wrote in a report, referring to the renminbi, another name for China’s currency.

Key to this is considering how Chinese wages affect its competitiveness, Slok says, because paychecks in the country have grown much faster than those for Americans, causing a "substantial erosion" in Chinese competitiveness relative to the U.S. So, he says, it makes sense for China to have a modestly cheaper currency to make its products more affordable to the world and help it regain some of that lost edge.

A 10 percent yuan devaluation would reduce U.S. inflation by about 0.1 percentage point, or 0.2 percentage point if other Asian developing nations pursue similar devaluations, Slok wrote. He also cited Federal Reserve estimates that suggest a 10 percent rise in the dollar would reduce U.S. core inflation by about 0.5 percentage point in the first year.

— With assistance by Xiaoqing Pi, and Jeff Kearns

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