But China's economy is currently not growing at 4-5% a year in nominal terms. That's the real number not nominal number. You are trying to compute the nominal GDP at current prices in USD, so should use nominal GDP at current prices in yuan along with the currency movement.
Chinese Economics Thread
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But China's economy is currently not growing at 4-5% a year in nominal terms. That's the real number not nominal number. You are trying to compute the nominal GDP at current prices in USD, so should use nominal GDP at current prices in yuan along with the currency movement.
Remember that after Trump won the 2024 election, Western think tank experts were predicting unprecedented large fall in RMB to result from the incoming Trump tariffs based on their faulty analysis of the 2018 trade war with glaring factual and logical errors (which I rebutted here last year).
The writer is a senior fellow at the Brookings Institution and a former chief economist at the Institute of International Finance
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But, if the president-elect follows through on tariffs, bigger changes are coming. In 2018, after the US put a tariff on half of everything it imported from China at a 25 per cent rate, the renminbi fell 10 per cent versus the dollar, in what was almost a one-for-one offset. As a result, dollar-denominated import prices into the US were little changed and tariffs did little to disrupt the low-inflation equilibrium before the Covid-19 pandemic. The lesson from that episode is that markets trade tariffs like an adverse terms-of-trade shock: the currency of the country subject to tariffs falls to offset the hit to competitiveness.
If the US imposes further and perhaps much larger tariffs, the case for renminbi depreciation is urgent. This is because China has historically struggled with capital flight when depreciation expectations take hold in its populace. When this happened in 2015 and 2016, it sparked big outflows that cost China $1tn in official foreign exchange reserves.
Maybe restrictions on capital flows have been tightened since then, but the main lesson from that episode is to allow a front-loaded, large fall in the renminbi, so that households cannot front-run depreciation. The larger US tariffs are, the more important this rationale becomes. Take the case of a 60 per cent tariff on all imports from China, a number the president-elect floated during the campaign. Factoring in tariffs already in place from 2018, this could require a 50 per cent fall in the renminbi versus the dollar to keep US import prices stable. Even if China imposes retaliatory tariffs, which will reduce this number, the scale of needed renminbi depreciation is probably unprecedented.
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