Chinese exchange rate | Devaluation of the yuan, war …

Judging by the number of lines published, the overall and local economic score for the week was devaluation of the yuan. Daily variations aside, the Chinese exchange rate which has remained for years nearly 6 units per dollar, with last week's devaluation rose to 7.

The first thing to say is that international consultants from the West have once again come to fruition. For years, they insist on two things: the imminent brake of Chinese growth, the reverse of the self-fulfilling prophecy, and the prediction of a revaluation of the yuan, in fact a criticism of it. interesting to its alleged undervaluation.

Second, the roles of dogmatic economists have been set afire again. Days before the Chinese devaluation, the Federal Reserve lowered the benchmark interest rate for the first time in ten years. In theory, this fall in rates should have revalued the currencies of the rest of the world, especially in emerging markets. The logic behind this is that capitals always move in search of higher rates. Not all, but the most speculative part, which in this case should cause departures from the United States and entry into the rest of the world. Capital inflows into a given location, making the dollar more abundant, allow for a revaluation of currencies against the reference currency. However, even before the devaluation of the yuan, the currencies of emerging countries were being devalued. The Chinese devaluation only twisted the process. As detailed by the Bloomberg agency, in the past week, 20 of the 24 currencies of developing countries have lost value against the US currency.

The reason? The capital is loose. This is an easy explanation, but the signs of great uncertainty have prevailed against a possible escalation of the conflict between the two great powers, the decadent and the emerging, which weighs at least for the moment on the minimum of US rates. . The badyst predicts that the conflict will result in lower trade and, as a result, lower business demand, which means lower growth and lower profits.

The third element was the local reading of world events. The dollar has again touched the ceiling of 47 pesos and the trade press explained that it was because of "the trade war between the United States and China." It is undeniable that financial markets are interconnected, but what is clear again is something else, that with the complete deregulation of capital movements, the small local market is ultra exposed. Any floating butterfly, whether it is the Turkish lira or the yuan, will always be magnified. This is the palpable cost of the deregulation zone. Behind, however, the real factors will always weigh. The local exchange rate is wired and the government's ultimate goal is to maintain it as an anchorthat is to say, to maintain as far as fiction on macroeconomic stability can be.

Finally, it remains a central theme, which does not refer strictly to facts but is fact-based, but whose understanding is vital to the local economy. One of the explanations for theChinese devaluation understood as a response to rising US tariffs. The concept here is the idea of ​​"currency war", the idea that a devaluation, lowering the production costs measured in the benchmark currency of international trade, the dollar, makes exports of the country more "competitive" than devaluing The concept lacks complexity. If production costs decrease, it is possible to sell export products at a lower price.

Argentine economists have mainly studied at universities where macroeconomics textbooks are written in central countries and explain this process in detail, which is also correct. It should be recalled that even multilateral organizations such as the IMF have been set up, one of whose objectives was to combat these "competitive devaluations".

These concepts are those that are the basis of the mythological idea "competitive exchange rate", an idea that means having understood what the macroeconomics textbook says, but with the detail of not having translated it into local reality. Zoom in: when large devaluations of the local currency occur, exports increase? In other words, are the series of exchange rate developments and local exports correlated? Or closer, since he badumed that the overall price and the dollar price were multiplied by five, did exports increase? The answers are three times "no".

What is unique in Argentina with the fact that the macroeconomic laws of the books taught in economics universities do not work? The answer is nothing. These are theories that describe the reality of countries whose exports are effectively competing for prices on world markets. On the other hand, if we look at Argentina's export basket, we see that the bulk of its products are commodities, that is, products at standard prices on world markets. Argentine exports are "price takers", that is, "they do not compete for prices". Consequently, the number of exports increases only when the supply increases ("a good harvest") or when external demand increases (prices increase).

The results of the cost reduction caused by a devaluation are very different. The first is the simple wealth effect for the exporter. The second is that it reduces wages in dollars. That's why we say that the dollar is also a distributive variable. And that's why devaluations are always followed by declines in activity, among other things because low wages drive down consumption. Then, while wages fall, distributive offers are launched, particularly in a society with strong unionization and memory of rights. Handsome combo: decline in activity plus inflation. The additional result is that the competitive exchange rate can not be stable. To be competitive and stable, workers should not have the power to negotiate, which can only happen in times of high unemployment, such as after the 2001-2002 crisis.

The tentative conclusion is that for the exchange rate to be non-Chinese, it is always good to remember the fundamental relationships.