China Bites The Cherry
(THE NEW YORK TIMES) Paul Krugman, January 11, 2016 — Are you staring to have the feeling that when it comes to economic policy Xi-who-must-be-obeyed has no idea what he’s doing?
China’s decision to devalue the renminbi had some economic logic behind it. As David Beckworth rightly points out, it’s not just about gaining a competitive advantage. China clearly has a weakening economy, whatever the official numbers may say, and would like to use monetary stimulus. But monetary autonomy and a fixed exchange rate don’t go well together; China’s capital controls give it some leeway, but it is nonetheless suffering from a lot of capital flight — and it wants to liberalize the capital account in pursuit of reserve-currency status. (A foolish goal, but that’s a subject for another day.)
So it would make sense on purely economic grounds for China to move to a free float, and gain the freedom to use monetary policy that, say, Japan has.