China will ease it’s pegged yuan currency

 

On Saturday, China indicated that it will let their currency, the yuan be more flexible and no longer be pegged to the US dollar. The timing of this announcement has been well thought out by the Chinese as we are less than a week away from the G20 meeting in Toronto. President Obama just sent out a letter to the G20 members stressing the importance of free floating currencies to the growth of the global economy. By announcing that they will relax their tight grip on the yuan, China is taking the wind out the US President’s sails.

The announcement did not include any details whatsoever, which allows China to not only avoid serious criticism at the G20 meeting, but also not hold them to any particular measures for making good on the announcement. They did not even give an indication on when they will begin implementing the relaxing of the yuan. The rest of the leading economies, especially the US, are really looking for China to stop manipulating their currency because this makes the US, European and other countries’ goods artificially more expensive to export. Some experts say that the yuan may be as much as 40% below its real value, which means that Chinese goods are more competitive than US and other goods than they should be.

For the US and Europe a yuan that is allowed to appreciate means that they will be more competitive with their exports to the Chinese market and will allow those economies to grow at a better pace. For China, it allows their own demand be better supplied because imports will not be as expensive due to a stronger yuan. Also, there are some inflation concerns within China, so a stronger currency can help quell that concern.

It is not known right now if China intends on doing anything at all or anything of real significance with their currency however. It is possible that they are just looking to avoid negative publicity during the G20 by having everyone say that they need to let the yuan float. Perhaps after the G20 is over they will forget all about their yuan announcement or do just enough to not be called liars but really not let the yuan float nearly enough. It seems that no one is really trusting China’s words right now because the announcement is so vague and they have not been very cooperative with this issue in the past.

Hopefully the US and other countries can come together and be truly unified on this issue if China does not let the yuan appreciate much and really put pressure on them to act more fairly and stop their currency manipulation.