China is letting the yuan “off the leash”, says Ian King in The Times. Since July 2008, the government has pegged its currency to the dollar in order to shield its crucial export sector from the impact of the global downturn.
This has caused a spat with US lawmakers. They point to China’s hefty current-account surplus (and the US deficit) as evidence that it is gaining an unfair trade advantage by not allowing its currency to appreciate against the dollar. Now China has moved back to a ‘crawling peg’ system introduced in 2005. The currency is allowed to rise (or fall), but it can only move in a band of 0.5% around a point set by the central bank every day.
Risk assets bounced so sharply you’d have thought the news signalled “a cure for male pattern baldness”, says FT.com. Analysts cited plenty of reasons to be impressed. The move will forestall US protectionism. It suggests that China has gained confidence in the strength of the global recovery. A dearer currency boosts Chinese companies’ and households’ purchasing power, which should underpin exports elsewhere. Meanwhile, cheaper imports should temper inflation, helping China achieve a soft landing. This marks the beginning of a shift away from China’s dependence on exporting, helping to rebalance the world economy.
Yet the move is hardly a “game changer”, as Capital Economics puts it. This isn’t a shift to a freely floating regime as the daily trading band is staying. And China won’t countenance a major rise in the yuan-dollar rate, given the yuan’s appreciation against the euro, says Rom Badilla on Bondsquawk. It can’t spur consumption overnight, given the “culture built on savers and under-investment”.
In any case, there’s more to global imbalances than currencies, as Economist.com points out. From 2005 to 2008, for instance, the yuan rose by 20% against the dollar, yet the Chinese current-account surplus, and the US deficit, kept rising.
As for protectionism, China’s announcement has defused tension before the G20 meeting this weekend. But with elections looming, China remains a “convenient economic scapegoat” for misguided legislators, says James Pethokoukis on Breakingviews. “The risk,”
says Capital Economics, is that China is “criticised for moving too slowly and that trade tensions escalate again.”