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China Agrees to “Flexible” Exchange Rate

A partial victory for the Obama Administration Saturday in advance of the G-20 meetings, as the Chinese government agreed to allow a “flexible” exchange rate for its currency. This does not necessarily translate to a full-scale appreciation of the renminbi relative to the dollar, but it could down the road.

China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit.

The decision to “increase the renminbi’s exchange-rate flexibility” was made after the economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged.

“The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said in the statement. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”

This could be a move to keep the US off China’s back during the G-20 more than anything. So far, the Treasury Department has praised the decision, with Secretary Geithner saying in a statement that “vigorous implementation would make a positive contribution to strong and balanced global growth.” He signals that he’d prefer China to increase their internal private consumption, which would potentially increase US exports and reduce the trade imbalance.

An Alliance for American Manufacturing report pointed to Chinese currency manipulation as a major contributing factor to a loss of 2.4 million American jobs since 2001 (when China joined the WTO). Thanks to this manipulation, “U.S. exports to China cost up to 40 percent more in China and Chinese exports to our consumers enjoy a subsidy of a similar amount. That’s unfair and unacceptable,” said Scott Paul, the Executive Director of the AAM. It remains to be seen if this exchange rate flexibility will lower those subsidies and boost American job growth. That’s the hope, anyway.

UPDATE: Currency hawks in Congress were not mollified by the Chinese statement. Chuck Schumer and others have threatened action if it does not follow through on their promises.

A number of top figures in Congress who have been pushing for China to allow the yuan to appreciate in value expressed measured skepticism toward the Chinese central bank’s announcement this weekend that it would allow more flexibility in exchange rates.

“This vague and limited statement of intentions is China’s typical response to pressure,” Sen. Charles Schumer (D-N.Y.) said in a statement. “Until there is more specific information about how quickly it will let its currency appreciate and by how much, we can have no good feeling that the Chinese will start playing by the rules.”

“We hope the Chinese will get more specific in the next few days,” Schumer added. “If not, then for the sake of American jobs and wealth, which are hurt every day by China’s practices, we will have no choice but to move forward with our legislation.”

House Ways and Means Committee Chairman Sander Levin (D-MI) made similar comments about the need for action if China doesn’t back up its promise.

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David Dayen

David Dayen