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Friday 18 Aug 2017 | 19:21 | SYDNEY
Friday 18 Aug 2017 | 19:21 | SYDNEY

Raising the RMB

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21 June 2010 12:23

Beijing has now made its latest move in the on-going game being played with Washington over the future of Chinese exchange rate policy.  It appears that the currency peg to the US dollar has been abandoned, although all indications are that any subsequent appreciation is likely to be both cautious and modest — much like what happened in 2005 when China last decided to opt for greater currency flexibility and in line with reasonable forecasts of what China was likely to deliver.

Unfortunately, this cautious approach also means that the bilateral friction over exchange rate policy is still going to be with us.

The timing of the decision to quit the peg is interesting, and seems to have caught many observers by surprise.

The run-up to next week’s G-20 meeting had brought growing US pressure for an adjustment to China's exchange rate regime, with President Obama sending a letter to G-20 leaders calling for market-determined exchange rates and US senators reviving legislation targeting the currency peg.  But conventional wisdom has always held that confronting China over the yuan is a counterproductive strategy, since, like most leaders, China’s do not want to be seen to be bowing to foreign pressure.  What's more, there appeared to be two further complications as far as Beijing was concerned – the crisis in the Euro area which had already seen the yuan appreciate significantly against the euro, and an upsurge in domestic labour unrest.  Yet this time, conventional wisdom looks to have been wrong, and the pressure seems to have paid off.

That said, the most likely reason that Beijing has decided to move on the exchange rate is that this is the best decision for the Chinese economy.  According to the latest upbeat assessment from the World Bank, for example, China’s economy is in good shape, and economic prospects now 'warrant a normalization of the overall macroeconomic stance.'  In other words, this is a good time to exit from the set of policies that were put together in response to the GFC, including the decision taken in mid-2008 to effectively re-peg to the US dollar. 

Moreover, by moving now, China has both managed to avoid a confrontation over its exchange rate policy at the G-20 and simultaneously shift the onus onto other countries to do their bit for the meeting's declared aim of delivering on global rebalancing.  Not a bad start.

Photo by Flickr user Patrick Yan, used under a Creative Commons licence.

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