And Why the TPP and AEC Trade Agreements Offset the Negative Aspects
By JC Collins
Back in October of 2015 I wrote a post titled TPP and AEC – Parallel Trade Agreements. It presented the trade agreement aspect of the monetary transition and suggested that both agreements are intended to address the changes to the international trade model as the US dollar begins to share reserve responsibilities with the Chinese renminbi.
It also discussed another previous post from May of 2015 titled The Secret of the TPP – The Coming Interest Rate Increases and Dollar Depreciation. Both articles together lay the groundwork for understanding the short-term measures and long-term strategies which China and the international community as a whole, are implementing in order to capitalize on the forthcoming appreciation of the renminbi and depreciation of the USD. The negative aspects of these exchange rate changes are also considered within the developing framework of these agreements.
With that information in mind let’s continue with a more academic definition of exchange rates. Since all countries participate in the international economy to some extent or another, exchange rates act as an important and comprehensive index metric of each nations participation.
As such, the exchange rate itself serves the purpose of providing a metrics based link between the domestic economy and market of each nation with the international economy and market as a whole, or with other participating member nations within that broader economy.
Any changes to a country’s exchange rate will have a direct effect on this relationship and dynamic between domestic economies and the international economy. So when we consider that the link between China’s domestic economy and the international economy has been deepening, the need for both short-term measures and long-term solutions becomes obvious.
One of the direct benefits of RMB appreciation will be cheaper imports for the Chinese. This will promote the growth of domestic consumption and facilitate China’s transition from an exporting trade model to a more financial services oriented consumerism model.
Renminbi appreciation will also encourage industrial restructuring within China. This aspect of the positive changes will facilitate the transition from trade exporting model by moving the domestic economy from labor intensive and low wage industries to capital, higher wage, and technology intensive industries. The TPP and AEC trade agreements will support these changes in exports and imports.
The appreciation of the RMB will increase China’s international purchasing power.
With the positive comes negative as well. RMB appreciation may also inhibit exports in the interim until more structural changes, like those discussed above, are fully implemented. Appreciation could also influence China’s foreign direct investment (FDI). This is best understood as a reduction in capital inflows for the purpose of investing in resource based FDI and an increase in capital inflows seeking market based FDI.
The negative aspect of the foreign direct investment component of the RMB appreciation can be minimized with strategies and measures to further develop China’s domestic financial market and increase the pace of monetary reform around the currency’s market orientation and interest rates.
So obviously the effects of RMB appreciation is something which needs to be addressed on multiple ends, from both China and the international community as a whole. The massive changes to capital flows and the need to manage changes to exports and imports within Asia is one of the more important aspects of the multilateral monetary transition.
The recent slowdown in global GDP is only temporary. The imbalances within the international monetary framework are slowly being corrected and adjusted. The depreciation of the USD and appreciation of the RMB are almost certain. This dynamic requires updated and more diverse trade agreements which can guide and facilitate the changes to international capital flows. Understanding these components of the multilateral monetary transition is the beginning to understanding where the investment opportunities exist. It also helps us understand what we can do to protect individual wealth in this challenging monetary period. – JC