Gady Epstein: China Currency 2.0: Yes, Change Really Is Coming (Updated)

Gady Epstein comments on the Forbes blog about the recent announcement that China would implement a gradual rise in its currency rates:

…The fallacy in arguing that China is merely trying to bamboozle the world with vague words is that this currency issue isn’t just about “China versus the world” or “China versus the U.S.” (even though many Chinese netizens are under this impression as well). It is also very much about policy factions within China fighting it out over what’s best for China. The biggest political winner from the People’s Bank of China’s statement Saturday is the People’s Bank of China, which has been pushing for more flexibility on China’s exchange rate against some entrenched interests, notably those who fear for China’s export sector.

To recap and oversimplify, the higher the yuan’s value against the dollar and other currencies, the more expensive Chinese-made toys, clothes and other consumer goods will be in the U.S. and elsewhere. But as China’s central bankers and many economists know well, a higher-value yuan also could mean some very good things long-term for the Chinese economy: lower inflation, higher purchasing power for Chinese consumers, lower prices for the many imported commodities (like oil) that are priced in dollars, and, yes, less dependency on . That all points toward, well down the road, a more balanced economy with more sustainable growth, which would please China’s policymakers, not to mention the rest of the global economy.

Which brings me to one more signal from Beijing in all of this that shouldn’t be lost on us: China is saying that it has weathered the worst of the global financial crisis, and that it will no longer use the crisis and fears of instability as an excuse to fix the RMB to the dollar. That is a hopeful message.

Update, 6/21/10, 5:07 PM:

From the New York Times, “Rise in Value of Currency to Be Slow, China Insists”:

A day after announcing that it would allow a more flexible currency, China said on Sunday that any appreciation in its value would be gradual, and it set the renminbi’s value in early trading on Monday at the same level as it traded on Friday.

By early afternoon, the renminbi had climbed 0.27 percent in Shanghai trading. This was the first time that the Chinese government has allowed such a jump in intraday trading since before it repegged the renminbi to the dollar almost two years ago.

The central bank’s statement on Sunday and the decision on Monday morning to leave the currency unchanged represented clear attempts to reassure the Chinese people that there would not be a disruptive change.

The Wall Street Journal blog Market Beat explains China’s currency valuation, in layman’s terms with help from C. Fred Bergsten of the Peterson Institute for International Economics:

Like most folks, we understand that China keeps its currency weak by buying up dollars. But as to exactly how this transaction occurs, we confess to having some questions.

Luckily for us, our position here at The Journal allows us to call up folks who actually do understand this stuff, and then pester them incessantly until they explain it to us in small, monosyllabic grunts, we’re capable of digesting.

[…] Ok, say we’re a U.S. manufacturer and want to build a factory in China. To build it, we need to have Chinese currency, because — oddly enough — that’s what people use in China. In order to do that, we’ve got to buy Chinese yuan.

So, we would go to a Chinese bank and change the currency, buying yuan and selling dollars. Now, if the yuan was a free-floating currency, the effect of this exchange — all things being equal — would be to drive up the value of the yuan.

And with all the excitement about the prospects for Chinese growth, a lot of companies likely want to build a lot of factories there. And the cumulative impact of all those inflows of dollars would be to drive the value of the yuan higher — if it was a free-floating currency.

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