China currency reform more word than deed

June 19, 2010

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.

Comments

China’s Central Bank has sought to defuse the huge pressure being built up on China to appreciate its currency.In a statement,the Bank it talks about “reforming the currency”.There is no hard numbers about appreciation or the timeline of the reforms.It would surprise me that China appreciated the currency too soon as its economy is already slowing down.http://bit.ly/dnpa7I

Posted by AGreenInvestor | Report as abusive
 

I agree 100% that the Chinese are simply paying lip service to Barack Obama just to shut him up.

The Chinese are known for being “inscrutable.” They say one thing and do the exact opposite.

It’s amazing to me that Wallstreet would open with a rally today singing the praises of the Chinese. We’ll see how that blind optimism plays out for the rest of the week.

Truly… for my own part, with regards to the market, absolutely nothing has changed. There’s still no job creation and Europe is about to enter into a long and deep recession, with the US needing to create jobs or our fate will be even worse.

Posted by Jones22 | Report as abusive
 

It’s still pegged, but they will re-peg daily the same valuation range as investors determine the upwards or downwards momentum – i.e. it’s not really open at all, just allowed to move the .03% per day that was the outer most level before this announcement.

Posted by CDNrebel | Report as abusive
 

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