China’s exchange rate policy is currently the predominant issue in global economics and was the big talking point at the recent annual meetings of the International Monetary Fund. On the outside this often looks like an argument just between China and the US. But its implications go well beyond these two countries. Many emerging markets, especially those in Asia and Latin America, have much to lose if the crisis over currencies is not solved quickly. To do so, both China and America must act.
At present the gap between economic growth and interest rates in the US and in emerging markets is growing. Thus the US dollar needs to depreciate against emerging market currencies. That is where the catch lies. Against which should it fall? Clearly, it can only depreciate against those that move according to market forces.
This means that if the exchange rate between the Chinese and American currencies moves very little, then other emerging markets bear the brunt as the dollar adjusts elsewhere. Countries like Brazil, Chile, Colombia and Peru – as well as developed but fast-growing economies such as Australia and South Korea – face unpleasantly large appreciation pressures. These are placing a heavy burden on their export and import-competing sectors, principally agriculture and manufacturing.