A weaker yuan is inevitable: and necessary for China if the world is to avoid a new crisis.

• Author: Choyleva, Diana

It sounds paradoxical, but a protracted slowdown in China is exactly what is needed to pull the global economy out of the post-crisis doldrums. Weaker growth in China, coupled with financial liberalization, can also bring about the global rebalancing that policymakers and the International Monetary Fund have long sought. But this happy outcome is not preordained. It requires the United States, Japan, and the eurozone to accept that China badly needs a much lower exchange rate to ease the pain of its economic transition. If the rest of the world balks at a cheaper yuan, the global economy could face a new crisis.

World financial markets took fright during the summer as investors finally realized that the Chinese economy was decelerating sharply. A rout in the domestic stock market and a clumsily handled mini-devaluation in August heightened fears of a hard landing, prompting the Federal Reserve in September to postpone a rise in interest rates--arguably the first time that China has decisively influenced the policy of a G-7 central bank. The markets are right about the slowdown. On our estimates, growth has more than halved on average this decade from the heady rates before the crisis. It slowed to 2.8 percent as of the third quarter of 2015, much lower than the official 6.9 percent estimate. It is difficult to see growth accelerating beyond 3-5 percent for the rest of 2015 and 2016.

China's slowdown is a catastrophe for commodity producers, as the recessions in the likes of Brazil and Russia show. It is also deflationary for most emerging markets, which are also suffering from capital outflows in anticipation of higher U.S. interest rates. They will need even weaker exchange rates, but nowadays an economically sluggish United States cannot accommodate currency depreciation in the same way as in the past. Hence the adjustment will also occur through domestic deflation--in other words, recessions, lower prices, and higher unemployment.

But the transfer of income globally from producers of natural resources to consumers is exactly what a world lacking genuine consumer demand needs. The slump in oil prices since mid-2014 has transferred $600 billion of real income from OPEC producers alone to the end users of that oil--mainly households in developed market economies. Consumers have largely chosen so far to hold on to money saved on cheaper gasoline and lower home-heating bills. Economic growth in Europe and the United States is subpar. But now...