China Herald: Why the devaluation of the yuan was a bad idea

Tom Doctoroff

If the 2% depreciation of China´s currency has shown anything, it shows its leaders are nervous and loss face, writes author Tom Doctoroff in the Huffington Post. Can China's growth model be reinvigorated, Doctoroff wonders. Yes, but not by using outdated control mechanisms.

Tom Doctoroff:

The legitimacy of Xi Jinping's regime has rests on two planks. First, his anti-corruption campaign, despite widespread assumptions it masks score settling, has stirred hearts by reinforcing the President's man-of-the-people appeal. The drive has also whetted expectations that his consolidation of power will provide the political capital necessary to carry out sensitive reform.

Few deny the need to re-engineer China's economic model. The importance of (increasingly inefficient) capital investment and exports buttressed by (increasingly scarce) cheap labor must decline relative to the contribution of consumer spending and the service sector. The reversion to an old economic playbook -- that is, a cheaper currency to the manufacturing sector -- represents a loss of national face. It is a bitter pill to swallow, one I suspect has been resisted for some time. The central government, eager to be perceived as standing tall on the world stage, is ultra-sensitive to any dilution of global stature. Mr. Xi's "China Dream" is rooted in prideful regional dominance. On both personal and national levels, the primacy of face, the fuel of forward advancement, is fundamental. It is sacrificed only as a last resort.

The depreciation smacks of fear for another reason. The Chinese cherish stability. It is a "platform" on which progress is constructed. Heretofore, the long game of economic reform has been deliberate but it has also been meticulously incremental.

But the Great Leap Forward, a crackpot economic strategy to industrialize the countryside, and the Cultural Revolution, ten years of destructive chaos, reveal another facet of China's psyche: the potential for anxiety to trigger impulsive decisions.

The tone deaf brusqueness of the currency intervention is inconsistent with the regime's cautious "lay low" approach to international engagement. It has destabilized currency markets and raised bold question marks on China's ultimate intentions. Leadership must now bend over backwards to reassure trading partners about its commitment to market-driven reform. If not, China's image as a "responsible stakeholder" in global institutions, so crucial to nation's rise, will suffer a blow.

Can China's growth model be reinvigorated? Yes. The digital revolution has broadened horizons. According to the National Business Daily, more than 10,000 enterprises are founded every day and the majority are Internet companies -- a burst of creative entrepreneurialism and democratized market opportunity ripe for the picking. And China's leadership is increasingly branché, sensitive as never before to the realities of globalism. But to reach the next level of prosperity, Beijing's mandarins will need to resist a basic instinct to control, well, everything. Yes, foreigners do not appreciate the exquisite delicacy of the central government's balancing act. But, still, the genie of China's economic dynamism is out of the bottle. And the PRC's upwardly ambitious middle class has achieved critical mass. The country's institutions need to evolve with the times, lest the Chinese people lose faith in a paternalistic government's ability to slowly but surely implement an economic agenda that delivers broad-based opportunity. Should that happen, Xi JinPing's Mandate of Heaven will evaporate and the world will be a much more uncertain place.

More in the Huffington Post.

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