The removal of the peg between the renminbi and the dollar has generated considerable heat and noise.
In terms of international diplomacy, the loosening of the peg is indeed good news.
The United States, which has already delayed its Treasury report in order not to have accuse China of currency manipulation, will probably now be able to issue the report and smooth over any currency tensions because of China’s act of good will.
However, in economic terms, there are two very good reasons not to get over excited by the development.
The first is that the loosening of the peg is unlikely to herald a dramatic revaluation of the renminbi. In 2005, the last time that the peg was taken off, the renminbi rose by a mere 1% against the dollar in the following 12 months.
The Chinese currency did, of course, go on to appreciate by 21% between 2005 and 2008, and perhaps a similar rise over the next three years would bring the renminbi up to a valuation that is more reasonable.
However, as Richard Spencer, my colleague at the Telegraph points out, this is unlikely to have any significant impact on solving those global trade imbalances that the weakness of the renminbi is supposed to have provoked.
As he notes, the period from 2005 to 2008, when the renminbi was appreciating against the dollar, saw the biggest increase in China’s trade surplus in recorded history, huge American deficits, and a massive build-up of China’s foreign exchange reserves, which were then channelled into cheap American loans so that the US could buy more and more Chinese trinkets.
If history tells us anything, it is that the issue of China’s currency is only a sideshow.
