China's Surging Currency Is a False Signal
The renminbi’s strength speaks volumes about how deeply troubled the economy is — just like Japan’s three decades ago.
Looks can be deceiving in the currency market.
Photographer: Paul Yeung/Bloomberg via Getty Images
Although it has been a little wobbly over the past few weeks, the performance of the U.S. dollar this year has been extraordinary. It has strengthened against just about every currency of consequence even though inflation pressures in the U.S. have been worse than expected and the Federal Reserve has done nothing to counter them. Also remarkable is that the dollar has gained against currencies that would in past times have been supported by buoyant commodities prices, as well as against currencies where central banks have raised interest rates.
Of the very few currencies that have been stronger than the dollar, China’s renminbi has put in the most dramatic performance. Most analysts say the renminbi’s strength has to do with huge demand for Chinese products, driving the country’s trade surplus higher, and for its government debt, which yields a lot more than government bonds in the developed world. That would be a more convincing argument had the currencies of countries with similarly strong net trade balances, such as Russia or Australia, been strong too. To my eyes, the renminbi’s strength speaks volumes about just how the bad country’s woes are — and how they are like Japan’s three decades ago.