Commentary
The latest China data continue to show an overall downtrend, although some rebound is seen. The domestic economy, as represented by internal demand (private and government consumption expenditure and investment), remains weak under deleveraging (paying off debts). One possible way to improve the situation is to rely on external demand, which is net exports. At first glance, this seems sensible because the outside world is in a much better shape economically than China. However, the global cyclical pulldown effect can offset this completely.
The standard way to counter such a headwind is to “lower the price;” it can be done actively by policymakers or automatically under market mechanisms. A worsening outlook ahead will lead to a fall in prices, be they prices of goods, assets, or others. This is a market outcome that is the most natural yet the most uncontrollable. In order to take a more active approach, policymakers often cut interest rates or depreciate exchange rates to restore competitiveness. Here the interest rate affects the price of an investment, while the exchange rate affects the price of net exports….