China's move to make its exchange rate more flexible will help put the world's third-largest economy after the U.S. and Japan on a course to boost the spending power of its own consumers and ease the strains with other nations caused by its long reliance on exports.
The decision to drop the nearly two-year-old peg, announced by the central bank over the weekend, was a difficult one for Beijing's leaders, even though it is likely to result in only a modest appreciation of the yuan.
The leadership had to overcome fierce resistance from a domestic export lobby, as well as its own nervousness that the economic problems in Europe and elsewhere will add to the risks of a transformation that will alter the country's drivers of growth. Yet with pressure on China building in both the U.S. Congress and the Group of 20 major economies, the decision showed pragmatism and a desire to set China's economic relations with the world on a more sustainable footing.
'China is taking a cooperative stance. They want to show that China is contributing to the rebalancing globally,' said Wang Tao, an economist for UBS in Beijing. 'China may not act as speedily as many people want, but they are moving in the right direction.'
That direction is toward an economy less driven by selling goods to the rest of the world and more driven by the spending of its own consumers. Both China's trading partners and the country's own leaders say such a shift would be good for China and the rest of the world: It would make China less vulnerable to external troubles, while also reducing the politically troublesome trade surplus and providing more opportunities for international companies in the Chinese market.
'China is now speeding up the restructuring of the economy and transforming its growth model, a task that has been made even more important and urgent by the international financial crisis,' the central bank said in a statement, arguing that a flexible currency will help that effort.
The decision to loosen the currency is evidence the Chinese leadership can push through structural changes despite domestic opposition. The move was hailed by world leaders. 'China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,' U.S. President Barack Obama said in a brief written statement. Leaders from Japan, Russia, and Europe also weighed in with approving statements.
China's move came just ahead of a summit of the Group of 20 major economies in Toronto next weekend, where China was set to face pressure to do more to aid the global recovery. Many of China's trading partners have been arguing that the peg kept the currency undervalued, giving Chinese-made goods an unfair edge and sapping other countries' ability to grow.
The decision to return to what China calls a managed floating exchange rate could help fend off an international confrontation over its currency practices -- though much will depend on how China actually lets the yuan trade. 'The significance of this policy will depend on how much the government of China allows the renminbi to appreciate over time,' Sander Levin (D., Mich.), chairman of the House Ways and Means Committee, said in a statement, using the currency's official name.
Investors also are likely to welcome China's move, because it lowers the risk of a damaging trade conflict that could hamper the global recovery. China's central bank cited the solid recovery in the nation's domestic economy as allowing the move, a judgment that could strengthen investor confidence that has been shaken by the debt problems in Europe and a slowdown in Chinese housing sales.
China returned to a fixed currency amid the crisis after allowing some flexibility from mid-2005 to mid-2008, and defended the policy as providing important stability amid the global turmoil. But by preventing its currency from rising, China was favoring its exporters at the expense of those who would like to buy more goods from abroad. And export-driven growth was looking increasingly unsustainable, with U.S. consumers paying down their debt and U.S. politicians angry over the trade gap.
A stronger currency in China alters that balance, by giving local consumers more international purchasing power and putting pressure on exporters to up their game. That was a change that the International Monetary Fund and others saw as increasingly important in bringing about what all major countries say they want: a new economic order that allows the world to grow steadily without artificial government stimulus.
Although the currency is just one part of China's complex economic picture, it is a key part. A stronger currency matters over time, said IMF Managing Director Dominique Strauss-Kahn, because it 'will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer.'
The announcement in Beijing caps months of intense diplomatic maneuvering by the Obama administration, and represents some payoff for the political capital it spent to smooth the way to a change.
In early April, U.S. Treasury Secretary Timothy Geithner delayed publication of a twice-yearly report on international currency practices. The move was sharply criticized by Congress, but was essential to the administration's plans to create a 'quiet period' when China wouldn't be subject to much public pressure on the currency. U.S. officials say the idea was to make it easier politically for China's leaders to move on the currency, as they could do so without appearing to yield to outside pressure.
A few weeks after announcing the delay, Mr. Geithner stopped in China after a trip to India, and he came away persuaded that Beijing was moving towards some action on the currency issue. But China didn't give a commitment on timing, and more weeks passed without any news.
Economists who had predicted that China would make a move before the unofficial deadline of the end of June -- when the G-20 leaders meet in Toronto -- started to push back their forecasts. And criticism of China in Congress started to heat up again, with Rep. Levin saying Congress would act if the G-20 summit passed without China changing course on the currency.
The Chinese did alert the Obama administration shortly before making the decision public. But publicly, Chinese officials continued to issue harshly worded rebuffs to questions about currency policy as late as Friday, keeping most of the world guessing right up to the surprise announcement on Saturday night. That delay allowed Beijing to achieve nearly ideal timing in both political and economic terms.
At the beginning of the year, currency derivative markets had been pricing in a rise in the yuan against the dollar of more than 3% over the next 12 months. But by the beginning of June, those expectations had collapsed to less than 1%, as investors got tired of waiting and scaled back bets on a gain in the yuan.
That means China can argue that its move wasn't pressured by financial markets and won't make speculators a profit. In addition, data released this month showed China's consumer price inflation going over 3% for the first time in a year and a half, boosting the argument for to use a stronger currency to tame higher prices.
Still, the currency move carries risks. Chinese policy makers are haunted by the example of Japan, which at the 1985 Plaza Accord agreed to a major appreciation of the yen against the dollar. Although there is debate about the causes, a real-estate bubble and a long economic slump followed in later years. The lesson many in China have taken from that history, rightly or wrongly, is that rapid swings in the exchange rate can be very damaging to domestic companies.
China's central bank addressed those fears head-on in announcing the decision, stating clearly that the exchange rate will be changed gradually so local companies have time to adjust properly and maintain their competitiveness. But that preference for gradual change is unlikely to appease longtime U.S. critics of China's currency policy, and could lead to continuing political problems for Beijing.
'There is a huge gap between what people in the U.S. Congress expect and what the Chinese authorities are really doing,' said Xiao Geng, director of the Brookings-Tsinghua Center for Public Policy in Beijing.
Yet that insistence on gradualism shouldn't obscure the significance of the change in thinking on the currency that has taken place, Mr. Xiao said. 'After a few years of debate and study, the people in charge of this issue, including the top policy makers, are now quite clear about the necessity of allowing real appreciation in the medium and long term.'
Fundamentally, the decision to leave the peg shows that China's leaders recognize that such a strict currency regime is incompatible with their large and rapidly growing economy. Incomes in China are rising, and over the longer term that tends to push up the price of goods and services and also the value of the exchange rate.
If the government tried to resist that process by holding down the currency, the result, economists say, would be much higher inflation, which could lead to serious social and economic problems. By accepting and managing that process with a flexible exchange rate, China should be able to secure a better economic future for its people.
Said Li Daokui , an academic economist who sits on the central bank's monetary-policy committee: 'This marks the beginning of a new era.'
回到中国称之为有管理的浮动汇率制的决定将帮助其抵挡来自国际社会关于中国汇率政策的压力，不过很多问题还要取决于中国在实际中如何操作。美国众议院筹款委员会(House Ways and Means Committee)主席列文(Sander Levin)在一份声明中说，这项政策的重要程度将取决于中国政府未来允许人民币升值的幅度。
北京清华-布鲁金斯公共政策研究中心(Brookings-Tsinghua Center for Public Policy)主任肖耿说，美国国会议员的预期与中国当局切实举措之间有很大差距。