Friday, 22 July 2005

China revalues renminbi...sort of

So, China has finally decided to revalue the renminbi from 8.28 to 8.11 yuan per dollar -- a whopping 2 percent increase. As Brad Setser said, "the change against the dollar is small. Very small".

I think the main significance of yesterday's announcement is that the renminbi moves to a managed float against a basket of currencies, which allows it the flexibility to move against the US dollar as well as paves the way for full currency convertibility. Apart from that, there is probably more political than economic significance.

At least American politicians appear to be pleased, according to this Reuters report.

U.S. Treasury Secretary John Snow applauded the shift as a significant contribution to global financial stability, while a senator who has been a leading critic of Beijing's currency policies called it a welcome "first baby step."

"If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome," Sen. Charles Schumer, a New York Democrat, said in a statement.

China was not the only country that removed its rigid peg to the US dollar yesterday. So did Malaysia, although Hong Kong did not.

The Japanese yen leapt 2 percent on speculation other Asian governments, afraid until now of giving China a competitive edge, would let their currencies rise on the yuan's coat-tails.

Malaysia promptly did just that, scrapping the peg that had frozen the ringgit since 1998 and switching like China to a managed float. But Hong Kong, whose currency is also fixed against the dollar, said it had no intention of changing policy.

Some people have suggested that yesterday's moves also paves the way for further revaluation of the renminbi. Apparently, though, the China Daily does not think so.

Expectation for a bigger appreciation of the yuan's value was, and will be, unrealistic. Exceedingly drastic response to the change could throw China's and many other Asian nation's economy into chaos, which would be bad news for everybody.

No doubt, the Chinese authorities would be aware of the risks outlined in my post yesterday.

Meanwhile, Nouriel Roubini and David Altig have an interesting debate on "Whither the Yuan?" hosted by The Wall Street Journal.

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