US President Obama’s imminent visit to Beijing seems to have had an effect on Chinese policy already, with Beiijng hinting yesterday that it was ready to consider the appreciation of the renminbi, 18 months after the government last pegged the currency to the US dollar.
Although the language of the statement was typically ambigious and non-committal, the People’s Bank of China now claim they will seek to "improve the renminbi exchange rate formation mechanism with reference to international capital flows and changes in major currencies". This is the clearest indication yet that Beijing will consider allowing the renminbi to appreciate against the falling US dollar.
The move will undoubtedly be a popular one, which is likely to please China’s friends in Asia, who have found it difficult to compete with China’s cheap prices in their exports to the US. It will also please those in Europe, who would benefit from the renminbi’s pegging to a basket of currencies rather than the dollar alone.
But before the rest of the world gets too excited, it is important to consider the impact of any major renminbi appreciation on China. A revaluation will impact the country’s export-driven economy, making Beijing’s worst fears – social instablity in the form of unemployment, company bankruptcy and lower tax revenue – a reality.
Charles Freeman, a former assistant US trade representative for China, points out that, at the end of the day, Beijing is unlikely to let the renminbi float too far. “It’s a cautious, go-slow approach. If their exports slow a lot and domestic demand weakens, the Chinese will slow appreciation of the renminbi again," he said.
In that respect, the US, Europe and China’s Asian neighbors would be foolish to count their chickens before they’ve hatched.
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