The truth behind China's exchange rate delusion

The current bout of anxiety is a symptom of the fact that China's transition from an export-led growth strategy is proceeding far less smoothly than hoped

China's management of its exchange rate peg continues to rattle global financial markets. Uncertainty about renminbi devaluation is fuelling fears that deflationary forces will sweep through emerging markets and deliver a blow to developed economies, where interest rates are at, or near, zero and thus cannot be lowered to defend against imported deflation. Fiscal gridlock in Europe and the US is heightening the angst.

But the current bout of exchange rate anxiety is really just a symptom of the fact that China's transition from an export-led growth strategy to one propelled by domestic consumption is proceeding far less smoothly than hoped. For some people, visions of the wonders of capitalism with Chinese characteristics remain undiminished. They are certain that, after more than three decades of state-directed growth, China's leaders know what to do to turn their slumping economy around.