China--window dressing a flexible yuan

Mark Thoma on China's announcement that it intends to increase the RMB exchange rate flexibility

...today's market response to the Chinese announcement suggests that this is a considerably less dramatic event than the press would like you to believe. Of course, the press is being spoon-fed the news by Washington. From the Wall Street Journal:

President Barack Obama, badly in need of good news, got some over the weekend from the most unlikely of sources: China, which said it would allow the value of its currency to rise, thereby answering the single most fervent prayer U.S. officials utter when seeking divine intervention to help with America's big trade deficit.

...the two moves show that the U.S.-Chinese relationship has a healthier glow than it did just a few months ago, when the two nations were arguing about global warming, a visit by the Dalai Lama to the White House and American arms sales to Taiwan.

More importantly, the steps suggest a certain maturing of China's view of its role in global affairs—and a more deft touch by the Obama administration in coaxing China into playing that role responsibly.

Note the spin - China's decision represents a "maturing," aided by the "deft touch" of the Obama Administration. Now, what did China exactly do to "mature?" China has not unpegged their currency. At best, they resumed a crawling peg policy put on hiatus two years ago. At worst, they simply uttered empty words that have no real economic relevance, whose only intention was to divert attention from China at the upcoming G20 meeting, allowing for a full court press on Germany. German Chancellor Angel Merkel should take a hint and issue the following statement: "The focus of German fiscal policy will be consistent with G20 goals of promoting global growth." Of course, German policymakers believe that means fiscal austerity, but no matter. It is the words that are important. Actions less so.

The PR overload suggests the Administration is desperately in need of a "win," no matter how trivial. After all, there is a hole in the Gulf of Mexico that is leaking oil uncontrollably, creating an environmental disaster that may rival what, Chernobyl? And it is clear the Administration was late in the game realizing the magnitude of the crisis. Meanwhile, unemployment hovers around 10%, and no one expects it to be much different in six months. While likely sustainable, economic growth is anemic compared to previous recoveries from deep recessions, and appears to guarantee a substantial output gap for years to come. The Administration has no real plan to close that gap, nor do they appear particularly troubled by it. Policymakers can’t even push through a low cost jobs bill.

But these are lesser problems. The full effort of American power can instead come to bear on Chinese currency policy and walk away with a monumental commitment to allow the dollar-renminbi rate to fluctuate within its existing trading band and perhaps appreciate imperceptibly.

While China appears willing to adjust the parity rate, changes are likely to be more window dressing than anything else. The industrial base shifted from the US to China over the past twenty years, a transition aided by the Clinton Administration's commitment to a strong dollar, and it is not going to come rushing back for a for percentage points of currency value. The structural shift has happened, and it won't reverse easily. Still, the story is not over yet. With this much praise, the Administration is clearly looking for something else from China. Further support on Iran? North Korea? Time will tell.

Posted via email from Jim Nichols