Beijing ‘liberates’ the yuan

China on Saturday signalled a major currency move, indicating it would end the renminbi’s artificial peg to the US dollar, which gave its exports an unfair trade advantage and brought it to the brink of a trade war with the US.

Citing an improved global economic situation, China’s centralbank, the People’s Bank of China (PBoC) said it had “decided to proceed further with reform of the renminbi (RMB) exchange rate regime and to enhance the RMB exchange rate flexibility.”

Although the statement ruled out a rapid appreciation of the renminbi against the US dollar and gave no time-table for the reform, the move was welcomed as an “important and correct” step which would serve the interests of both China and the world.
Even a gradual appreciation of the renminbi would promote Chinese consumption, marginally correct global trade imbalances, and contribute to global economic stability, said Deutsche Bank economist Jun Ma.

US treasury secretary Timothy Geithner, who has been under pressure from US lawmakers to declare China a “currency manipulator”, said he welcomed China’s decision and called for “vigorous implementation” of the change.

IMF managing director Dominique Strauss-Kahn welcomed the move, and said a stronger renminbi “will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer.”

It would also help Chinese policymakers’ efforts to fight inflation, which last month jumped to a 19-month high of 3.1 per cent, exceeding the government’s target.

A renminbi appreciation would also marginally benefit exporters in other emerging economies, including India, and give their central banks a bit of elbow room to allow appreciation of their currencies to tame inflationary pressures.

China pegged its currency to the US dollar nearly two years ago after the global financial crisis caused its exports to collapse. In recent months, after its exports and its economy recovered dramatically, it has come under increasing international pressure — from the US in particular, but from other countries as well — to end the peg that served to undervalue its currency.

US lawmakers have been pushing the Obama administration to levy high tariffs on imports from China.

China has all along resisted calls for it to allow the renmibi to appreciate, pointing out that the RMB had appreciated against a trade-weighted basket of currency following the slide in the value of the euro ever since the sovereign debt crisis erupted in Europe.
Even so, China was facing isolation at next week’s meeting of leaders of the Group of 20 economies, after US President Barack Obama circulated a letter calling for “market-determined exchange rates”.

“The timing of the (PBoC’s) statement will naturally be linked to the forthcoming G20 meeting,” points out RBS economist Ben Simpfendorfer. But while a more flexible currency would be welcomed by China’s critics, “it is clearly unlikely to appease those calling for large revaluation”. In his estimation, tensions will persist, especially heading into the US Congressional in November, particularly if the crisis in Europe worsens.

In announcing the move on Saturday, the central bank said the global economy “is gradually recovering” and that “the recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability.”

Not everyone is, however, convinced that the renmimbi will still be allowed to appreciate against the US dollar. “This is just a gesture, pure rhetoric, and does not mean an immediate revaluation of the yuan is imminent,” says Qu Qing, analyst at a Shanghai securities firm.

Credit Suisse economist Dong Tao too said the PBoC announcement was “a gesture to the US, but without a specific timetable... The pressure is on China now to move its exchange rate ahead of the G20 summit.”

Zhao Qingming, an analyst at China Construction Bank, suggested that although the central bank statement meant that China would exit from the dollar peg, the effect may be that the yuan may depreciate — not appreciate — against the dollar.

Simpfendorfer too concedes that the reference in the central bank statement to a currency basket “will raise speculation” of yuan depreciation in the event of further strength in the US dollar. But he adds that while such a move was “theoretically possible”, it would weaken China’s repeated assertion that a stable yuan was important for global recovery.