The Global Economy in Turbulent Times

CHAPTER 135 China: RMB Flexibility Not Enough¹

Chapter 134, “China: Realities about Its BOP Surpluses,” concluded with: “Exclusive focus on China’s exchange rate policy is, I think, counterproductive. It will unlikely resolve the United States’ persistent external imbalance. However, as I see it, there is growing awareness in Beijing that greater exchange rate flexibility and a gradual renminbi (RMB) appreciation has to be an element of any credible package of policy measures for China to seriously liberalize factor markets and remove cost distortions. This could well transit over time to a full market economy. Any exchange rate adjustment has to be viewed in this context.”

Sure enough, the People’s Bank of China (PBoC) announced on June 19, 2010, that it would allow greater flexibility for the RMB or yuan. Thereby, reverting to the flexibility it enjoyed before the RMB was effectively repegged at around 6.83 per US$ in mid-2008 to provide stability during the global crisis. In the three years following an initial 2.1 percent revaluation of the RMB on July 21, 2005, the currency gained a further 19 percent. But in those first remaining months of 2005, the appreciation was only 8.6 percent.

Credibility Requires Serious Action

China’s decision to allow flexibility back into the value of the RMB was greeted with “grudging optimism.” Few think, and rightly so, that the move will have a dramatic impact on rebalancing the global economy—partly because of its limited size. The RMB ...