China currency reform more word than deed
China has done something and nothing about the value of its currency. The People’s Bank said on Saturday that it would be more flexible in managing the yuan, though saw no need for a one-off hike. That may delay further clashes between China and its main trade partner, the United States. Without visible results, it is unlikely to be a lasting truce.
In a sense, this is a return to business as usual. The de facto peg against the U.S. dollar was brought in as a crisis measure in 2008, when Beijing was worried that export growth would be hammered by the global downturn. China now risks overheating more than recession, so keeping the peg looks unnecessary.
The timing is politically astute, though. A promise of yuan reform should keep the redback off the top of the agenda when G20 leaders meet next weekend. Chinese officials had hoped not to engage on the yuan in Toronto, but with U.S. unemployment high and China’s exports growing 49 percent last month, year on year, they may have had no choice.
President Barack Obama will see this as a reprieve. He has had to balance China’s intransigence with mounting calls for action from U.S. lawmakers who want China’s restrictive currency practices to be remedied through trade sanctions. Treasury Secretary Timothy Geithner has also been under pressure to label China a “currency manipulator”.
Talk of reform, however indefinite, should buy them both some time.
Big changes in the yuan’s value are unlikely in the short run. Beijing cannot afford drama. Marked appreciation might attract unwanted capital inflows, and squeeze exporters. Moreover, upward pressure isn’t what it was. A falling euro has already caused appreciation on a trade-weighted basis in 2010. It would be surprising if the yuan moved more than a few percent against the dollar in the next year.
In the longer term though, the change in rhetoric looks a sign that Beijing’s top brass is thinking hard about the yuan’s future. In the long run, a freer and pricier currency looks better. It would at least reduce the dizzying accumulation of foreign currency that comes from sustaining China’s dollar peg, and increase affordability of imported commodities.
For now the proof will be in the pudding. America’s China-bashers will be watching the yuan-dollar rate even more closely for signs that something has changed. If it hasn’t — or if the resulting change actually delivers a cheaper yuan in dollar terms — U.S. threats of retribution are likely to return with a vengeance.