Chinese Appreciation

The Wall Street Journal ran a headline article, a series of other articles and an unsigned editorial on China allowing its currency, the Renminbi (RMB), to appreciate against the Dollar (USD). This announcement comes before next week’s meeting in Toronto, Ontario of the G20. It is interesting that the People’s Bank of China (PBoC) made this decision on a late Saturday evening which would be exactly a week before the start of the G20 Conference. Upon the release of the news, many other East Asian currencies appreciated because many currencies in the area are correlated with the behavior of the RMB. The Korean Won, the Malaysian Ringgit, the Australian Dollar and the New Zealand Dollar all appreciated against the USD.

The Chinese seemed to have made this decision while being pulled by both internal and external political factors. Internal factors include exporters and workers inside China who worry that a stronger RMB against the USD will lead to fewer exports, less business and stagnant wages. External factors, mostly from Western governments, were pulling for an appreciation. US Secretary of the Treasury, Timothy Geithner, lauded the move of the PBoC by calling it, “an important step” before recognizing, “the test will be how far and how fast they let the currency appreciate.” Indeed, China has said that any moves in RMB appreciation will be gradual. Furthermore, China still has no intentions of going to a free floating exchange rate; rather Chinese officials envision a managed floating exchange rate.

The lesson for Western governments and enterprises is not to get too excited on the news. Despite the hoopla, The West’s various economies are full of “structural flaws” and will continue to have “turbulent times,” the behavior of the RMB notwithstanding. If Western governments are truly worried about the state of their nations’ finances: they would end the artificial stimuli; work with their central banks in an effort to liquidate the junk from their balance sheets; and start getting serious about moving away from, what seems to be, a permanent zero-interest rate policy.