China has taken what Barack Obama called the “constructive step” of abandoning the renminbi's peg against the US dollar. The timing and manner of its announcement are astute, and the US president is right to welcome the change. Coming just a week before a G20 meeting in Toronto at which the Chinese currency was expected to draw criticism, the move should ease pressure on Beijing and lower the prospects of a trade war.
The announcement by People's Bank of China follows heightened rhetoric against what Beijing dismissed as “baby-kissing politicians” trying to make political capital out of China's currency policy. The central bank used technical grounds to justify the move, saying that improvements in the global economy and China's “solid” recovery made it appropriate to “proceed further with reform of the RMB”.
The politics is clever. But the real economic implications are unclear. When Beijing lifted its currency peg in July 2005, it allowed the renminbi to appreciate against the dollar by 21 per cent over three years to mid-2008 when the peg was reinstated. Beijing could again allow a similar pace of appreciation. But it could go much slower. China remains nervous about Europe's debt crisis and divided over the wisdom of giving up export competitiveness. The central bank pointed out that China's current account surplus had already fallen significantly, adding: “The basis for large-scale appreciation of the renminbi exchange rate does not exist.”