CHINA CURRENCY DEVALUATION ANOTHER SIGN OF GROWTH WORRIES / THE WALL STREET JOURNAL

China Currency Devaluation Another Sign of Growth Worries

By Jon Hilsenrath


In the U.S. movie “The Wizard of Oz,” a mythical figure purported to have great powers suddenly loses his mystique when he is revealed to be no more than an aging silver-haired man pulling levers of a clunky oversized contraption behind a curtain. There is something happening in China which has a Wizard of Oz quality to it right now.

Chinese authorities awed the world during the 2007-2009 global financial crisis when they kept their economy growing at superfast speeds even when the rest of the world was nearing economic collapse. It seemed to be confirmation, after years of growth rates that allowed China to leap past rivals and become the world’s second-largest economy, that the Middle Kingdom and its leaders were special. Now, as the growth rate slows, the levers aren’t working very well and the image is losing its aura.

Chinese authorities on Tuesday effectively devalued the yuan by 2%. As currency devaluations go this was small. In 1994 China let its currency fall by a third, helping to breathe new life into an export explosion. Officials said this latest move was meant to allow the carefully managed currency move more in line with market forces. Yet it looked like a new step – albeit a small one -- by officials to boost flagging economic growth. A weaker currency might help boost exports by making them cheaper. On Saturday the government reported that exports fell 8.3% in July from a year earlier.

While a weaker currency might help exports on the margin (and also annoy China’s trading rivals) it doesn’t fix China’s underlying economic problems. The country’s economy appears to be suffering from the depleting after-effects of not one but three asset booms – an investment boom in industrial capacity which is weighing on global goods prices, a real estate boom which may have stretched domestic banks and more recently a stock market bubble.

Adjustments from bubbles rarely go smoothly and they almost always sap some economic vitality. As the wizard says in the movie, pay no attention to that man behind the curtain.