China’s announcement that it will introduce more flexibility into its exchange rate is a deft political move amid rising international criticism of Beijing, but the economic implications are much less certain.
Although Chinese officials insisted yesterday the decision was taken for domestic reasons, the announcement comes a week ahead of a G20 summit in Canada that was shaping up to be something of a showdown over the level of the Chinese currency.
By indicating that the peg between the renminbi and the US dollar was now likely to be broken, Beijing had “stolen the thunder” from the US and other governments that hoped to use the summit to put pressure on China, said Eswar Prasad, a former IMF China economist now at Cornell University. “They have taken the issue right off the table for the G20 and can refocus attention on what they see as the real problem for global financial stability – rising government debt in the advanced economies, especially the US.”