Saturday, June 19, 2010

Breaking News: China to Do Something About Exchange Rates

. Saturday, June 19, 2010

The sort-of sarcastic title above is in reference to this:

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.

What does "enhance the RMB exchange rate flexibility" mean? Beats me, but we should hear more details before the upcoming G20 meetings:

The statement, from a bank spokesman, gave no details of when China would allow its currency to appreciate and by how much. But the timing of its release, just before the leaders of the world's largest economies gather for a G20 meeting in Toronto, appeared clearly aimed at taking pressure off Beijing over the issue. Many countries, including the United States, have criticized China's fixed exchange rate, which critics say was keeping the value of Chinese exports artificially low. ...

The move was immediately welcomed by the White House, which saw it as a vindication of President Obama's nonconfrontational policy of trying to quietly negotiate over the exchange rate.
(bold added)

In other words, the Obama administration is saying "Shut up, Krugman". (This is also a small vindication for those of us who have opposed Krugman's China-bashing over and over again.)

But the statement from the People's Bank is purposefully vague, and there are basically no details of what China is and is not prepared to do. "Enhance flexibility" would seemingly indicate that China's "managed float" will be a bit less managed, and this will lead to some appreciation of the RMB relative to the dollar and euro. The proof of that will be in the pudding, so before we come to any judgments it will be better to see just what sort of "flexibility" Beijing has in mind, and how they end up implementing it.

Still, this could be significant news.


Breaking News: China to Do Something About Exchange Rates




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