The rocket fuel behind China Shock 2.0: Weak currency, deflation

livemint.com:

SINGAPORE—In explaining China’s recent export surge, which has alarmed business leaders and politicians in the U.S. and Europe, many have blamed the country’s lavish manufacturing subsidies and bulging industrial capacity. But there is another factor at play: China’s currency, and inflation—or its absence.

China’s real effective exchange rate, which adjusts for differences in inflation between China and its major trading partners, is back to where it was in 2014, unraveling a decade of steady appreciation. This real-terms weakness of China’s currency, also known as the renminbi, is turbocharging China’s overseas sales at the expense of other exporting nations. It is also heaping extra pressure on other economies and their currencies, especially in Asia, which are simultaneously feeling the strain from a strengthening U.S.

dollar. For the U.S., which has clashed with China over the yuan in the past, the currency’s inflation-adjusted slide means goods made in China are even cheaper than before, a trend reflected in weak import prices. That makes Chinese products keenly attractive for Americans, blunting U.S.

officials’ goal of reducing reliance on Beijing. “There is still an enormous incentive to use the Chinese supply chain," said Brad Setser, senior fellow at the Council on Foreign Relations. “China is incredibly competitive at this exchange rate." Compared with a basket of the currencies of its major trading partners, China’s yuan has fallen 6% from a recent peak in March 2022, according to data from the Bank for International Settlements, an international group of central banks.