Global IssuesChinese Currency Concession Eases Pressure Ahead of Summit
China's central bank announced Saturday that it would give the Chinese Yuan (RMB) flexibility to gradually rise in value against the U.S. dollar in a move that was welcomed by Washington and designed to appease global leaders at this weekend's G20 meeting in Toronto.
'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,' read a statement released on Saturday on the People's Bank of China website.
In recent weeks, the Barack Obama administration has been under increasing pressure from Congress to list China as a currency manipulator.
'We welcome China's decision to increase the flexibility of its exchange rate,' said U.S. Treasury Secretary Timothy Geithner in a response to the announcement by the People's Bank of China. 'Vigorous implementation would make a positive contribution to strong and balanced global growth.'
Leaders of other major economies also welcomed the announcement which serves to defuse a potential source of tension before the G20 summit.
'I hope this will contribute to stability and balanced growth in the Chinese, Asian and therefore global economies,' said Japanese Finance Minister Yoshihiko Noda.
The European Commission responded with a statement reading, 'The decision will help achieve more sustainable growth in the global economy, contribute to reduce external imbalances and strengthen the stability of the international monetary and financial system.'
A day before Beijing announced its intention to give new flexibility to the RMB, the World Bank, in its quarterly report on China's economy, had suggested that a more flexible exchange rate could give the Chinese economy more independence from the U.S. economy's cyclical conditions.
The RMB has been held to a de facto peg since 2008 when Beijing stopped the gradual appreciation which the currency had been undergoing since 2005.
Reactions on Capitol Hill were mixed as lawmakers remained unsure about what Saturday's announcement will mean for the RMB and the U.S. economy.
Charles Schumer, an outspoken critic of China's exchange rate policies, expressed doubts that the recent announcement would bring meaningful reform.
'Until there is more specific information about how quickly it will let its currency appreciate and by how much, we can have no good feeling that the Chinese will start playing by the rules,' said Schumer.
House Ways and Means Committee Chairman Sander M. Levin welcomed the announcement but warned that previous promises of reform had been followed by sufficient appreciation of the RMB.
'This is a positive first step, but it remains to be seen whether this move will be more symbolic than significant. The significance of this policy will depend on how much the government of China allows the renminbi to appreciate over time. We have seen actions like this before and it is clear that China did not allow enough appreciation the last time it adopted a policy like this one, from 2005-2008,' said Levin.
The sentiment was mirrored by Rep. Mike Michaud, chair of the House Trade Working Group, who said, 'It must be accompanied by a true appreciation of China's currency for it to represent meaningful progress for American workers and businesses. Whether or not this is an actual success to be celebrated will be measured by the extent to which China allows the yuan to increase in value and how that affects our economy.'
Indeed, Michaud's concern about the effects of the RMB's value on the U.S. economy has been the cause of a growing rift between Beijing and Washington as lawmakers, facing a contentious summer of campaigning amidst a flagging U.S. economy, seek to pursue the populist agenda of attacking China's valuation of the RMB.
High unemployment numbers and a U.S. business community which is increasingly critical of China's valuation of its currency and its failure to adequately enforce intellectual property rights protection has pushed lawmakers to take a critical stance towards China's economic policies.
Beijing, for its part, has contributed to the downturn in relations by cutting military exchange programmes between the U.S. and China for 2010 to protest U.S. arms sales to Taiwan and to express its concerns over a pending decision by the White House to authorise the sale of new F-16 fighter jets to Taiwan.
Today's announcement would seem to lighten the pressure on the White House, which was finding itself under increasing attack for failing to condemn China's pegging of the RMB and offer greater room for both U.S. and Chinese leadership to find common ground on the host of issues to be discussed at the summit.
'Overall, you have to see Beijing's announcement as showing President Hu grasps the importance of the political battle here, and helping China and President Obama, both at the same time, when possible,' wrote Chris Nelson in the insider newsletter The Nelson Report.
© Inter Press Service (2010) — All Rights ReservedOriginal source: Inter Press Service