As Jerome Powell threatens to pick up the pace of tightening, Xi Jinping’s China might owe the Federal Reserve chairman a giant thank you.
For the Chinese president, 2022 is turning about 180 degrees differently than he hoped. This was to be the crowning year of a career-long ambition to secure a third term as leader, an unprecedented feat. First, there would be a global charm offensive as Beijing hosted the Winter Olympics in February. Then, at year’s end, the big leadership coronation.
The Omicron Covid-19 variant flipped the script, making the Olympics a global ratings dud and sending economic headwinds China’s way. Then Vladimir Putin added new ones by invading Ukraine, putting his friend Xi on the spot. The economic fallout is threatening this year’s 5.5% growth target.
Enter the Fed to toss Xi a timely, if inadvertent, lifeline. On Monday, Powell signaled the Fed is prepared to take all “necessary steps” to curb inflation, even if that means hiking by increments bigger than 25 basis points, the amount by which the Fed moved last week. By signaling as much, Powell all but ensures the dollar will be rising versus the Chinese yuan. That could greatly help Xi and his team make this year’s growth numbers.
On any list of Beijing’s biggest 2022 headaches, a strong yuan is near the top. A high exchange rate is impeding China’s all-important export engine at the worst possible moment.
The idea that China’s currency is overvalued is enough to make the heads of many Donald Trump supporters explode. Among the main engines that propelled Trump into the White House in 2017 was griping about a “weak” Chinese currency he said was “killing” American prosperity.
Facts can be inconvenient, but the yuan today is more than 8.5% stronger than it was when Trump entered the presidency. That’s in part because since 2016, China has been working to “internationalize” its currency, in part because Asia’s biggest economy is becoming a bigger investment destination.
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But as 2022 goes awry, Xi realizes a rising yuan is making 5.5% a more challenging goal. That can be seen in the People’s Bank of China using its “currency fixings” process to cap the yuan, if not guide it markedly lower.
It’s a stealthy process. The last thing Xi wants is for Trumpists in Washington to start accusing Beijing of currency manipulation. Yet by stepping up the pace of rate hikes, Powell may do Xi’s work for him. And help stabilize China’s economy in the process.
There’s any argument that China should be thanking its lucky stars for a firm exchange rate amid surging global inflation. On the one hand, it reduces the risk of importing inflation via high oil and other commodity prices. On the other, it makes it easier for China Evergrande Group and other maxed-out developers to avoid defaulting on dollar debts.
Also, there’s an argument that China doesn’t require the same kind of export jolt it did in years past. President Xi Jinping has invested big on his “Made in China 2025” project to own the future of artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other key sectors.
Yet Xi’s extreme need for control has kept the state sector firmly at the core of everything. Ask Alibaba Group founder Jack Ma how being the face of China Inc. is working out for him. Or how the billionaire visionaries who built Tencent, Didi Global, Baidu, Meituan and other tech giants are feeling about Xiconomics.
There are, admittedly, hopeful signs. Xi’s inner circle appears to realize the $1.5 trillion stock rout caused by its regulatory crackdown is a headwind all its own. In recent days, Xi’s team cheered markets with talk of supporting companies in harm’s way and helping to reinvigorate the initial public offering market.
Any resulting boost to confidence could help China make up for the last 16 months of regulatory chaos. The fastest way, though, would be a weaker yuan trend that doesn’t bear Chinese government fingerprints.
In the long run, the yuan’s trajectory is still clearly upward. As China, already the largest trading nation, gets added to more global stock and bond indexes, capital inflows will boost the exchange rate. It’s a dynamic Xi wants, and his government has been preparing for the yuan’s moment in the spotlight.
Yet in a year that’s fast going sideways for Xi’s Communist Party, every bit of economic tailwind helps. And if this one is the Powell Fed’s doing, Xi sure isn’t going to complain about it.