(Update below.) Yesterday I mentioned the mounting concern I'd been hearing in China that despite everything -- despite a "decent interval" of minimal public criticism from the US including deferral of a "currency manipulator" judgment from the Treasury Department, despite the recovery of China's economy and its exports, despite faltering recovery efforts elsewhere -- the Chinese government might end up stonewalling and refuse to make even the tiniest gesture toward letting its currency, the RMB, start rising in value again.
The RMB had been pegged at around 8 to the dollar until July, 2005; began a "managed float" to about 6.8 to the dollar until July, 2008; and has been frozen again at around 6.8 ever since, as part of a Chinese government effort to preserve its export industries when the financial crisis made foreign demand collapse, especially in the US. The assumed deadline for the Chinese government to do something to show movement on this front has been the G20 meetings a week from now in Canada.
At 7am this morning US East Coast time, the People's Bank of China published an announcement on its website that appears to signal the change everyone has been expecting. Chinese version here, with a posting date two minutes earlier. It begins:
Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
We'll see next week, and in months to come, what exactly this will mean. Early analysis here. But to yesterday's question -- might they really decide to stonewall? and make their intransigence the center of the G20 meetings? -- the answer appears to be No. Which matters. More later.
UPDATE: Andy Rothman of CLSA in Shanghai, in his "Sinology" newsletter, sums up the situation thus:
I expect Treasury and the White House to support even the extremely slow rate of appreciation I anticipate over the coming months. The Obama Administration will make the case that 1) re-breaking the peg is the most important thing, and 2) with Europe - - China's largest export market - - in economic turmoil, it is realistic for Beijing to only make marginal changes in the exchange rate at this time.... Today's PBOC announcement reflects an exceptionally high degree of political and economic pragmatism in Beijing, and a strong desire to avoid conflict with Washington.
I agree. We have heard a lot in the last six months, especially after Barack Obama's supposedly "humiliating" visit to China late last year, about the shift of power that has made the Chinese government dismissive of outside views, especially America's. That argument has seemed overstated all along, but would have had been powerful if Chinese officials had refused to budge on the RMB. More on this soon.
Also, for the record, I discussed the RMB this evening with Guy Raz on Weekend All Things Considered, which had very compelling interviews with Rory Stewart about Afghanistan and with Eminem about ... Eminem.
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