BOSTON—China’s latest currency policy has received mixed reviews from U.S. analysts and economists amid signs that changes in the yuan’s value may be small, gradual, and slow.
After months of mounting international pressure, China’s central bank announced June 19 that it would “proceed further with reform” of its rigid exchange rate system, which has kept the yuan tightly tied to the dollar for nearly two years.
U.S. exporters have complained for years that China artificially undervalues its currency by 25 to 40 percent, giving its goods an unfair price edge abroad.
Under its new policy, the People’s Bank of China (PBOC) has resumed a “managed float” that allows narrow daily fluctuations in value, which were suspended during the world financial crisis in 2008.
Economists say the slight flexibility may add up to a significant adjustment that reflects the yuan’s real value, but only by small steps over time.
“I would say that the most credible numbers are that the yuan is maybe 25 percent undervalued relative to the dollar, so that over the next 24 months we could see an appreciation of that magnitude,” Harvard University economist Dale Jorgenson said.
“That would be huge, of course, but I think that is something that could easily take place.”
The PBOC’s move followed growing calls in Congress for legislation that could lead to tariffs on Chinese goods, as well as pressure on the issue before the June 26-27 Group of 20 (G20) summit in Toronto.
In a letter to G20 leaders on June 18, President Obama stressed that “market-determined exchange rates are essential to global economic vitality.”
Jorgenson said the timing of China’s decision to loosen reins on the yuan, or renminbi (RMB), may have been “carefully calculated” to avert a G20 debate, but the policy is part of a broad economic effort to boost demand and sustain the recovery.
“It’s part of a series of moves the Chinese are going to make,” he said. Wage increases are already in progress, helping restore some of the income that many workers lost when they moved away from China’s coastal manufacturing centers during the slowdown.
Policy changes are also needed because China’s 4 trillion yuan (U.S. $586 billion) stimulus program is set to wind down by the end of the year, Jorgenson said.
More politics, less movement
Other economists see more politics and less movement behind a policy change that has been long overdue.
“The Chinese have played this quite astutely, as they always do,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.
“They could see that the political pressure was mounting not only from the United States but also from India, Brazil and a few other countries, and they definitely did not want this to be a ticket item at the G20,” he said.
Hufbauer agrees that the change will help Chinese consumers by slightly lowering the cost of imports, but officials have played up the domestic reasons for the PBOC’s timing.
“The Chinese can claim it was not due to external political pressure, it was due to their own internal domestic needs,” Hufbauer said. But the limited flexibility in setting the yuan’s value is far from a market-determined exchange rate, he said.
The RMB is likely to rise slowly by no more than a half to 1 percent per month, strengthening only moderately through the end of 2011, Hufbauer said.
“My guess is about 15 percent appreciation over the next year-and-a-half, which is a fairly long period of time. That would take the RMB down to approximately six to the dollar,” he said.
“I don’t think they will do more than that because I’m expecting the euro to decline further relative to the dollar in the next year, and that means that the RMB is appreciating.”
Only a partial solution
Prior to the announcement, the PBOC kept the yuan pegged at about 6.83 to the dollar. In the first week of the new policy, the currency rose only slightly to 6.79 per dollar.
“There’s no disagreement that the Chinese currency is undervalued,” said U.S. Commerce Secretary Gary Locke at a Senate Finance Committee hearing on June 23.
David Bachman, professor of international studies at the University of Washington in Seattle, said China’s policy change is closely calibrated to deal with U.S. political pressure on the currency issue.
The limited reform is only a partial solution to China’s problems with Congress, said Bachman.
“It probably isn’t going to solve them, but it may make them manageable,” he said. “If the yuan continues to appreciate even at a gradual rate, people who have interest in exporting to China ... are likely to be able to say there’s progress being made.”
The currency’s appreciation is expected to be slow and subject to starts and stops, driven by political or economic conditions, said Bachman.
The policy has angered sponsors of currency measures in Congress, who threatened to press ahead with legislation after years of delay.
“We’re fed up and we’re not waiting,” said Democratic Senator Charles Schumer of New York, according to AFP. “Nothing ever changes unless you force the Chinese to act.”
China’s small steps seem unlikely to ease either the political or trade frictions with Washington.
“This is China’s way to delay and make it as slow-moving an adjustment as possible to deal with the problem,” said Bachman. “As long as there’s a very large Chinese trade surplus with the United States, the issue isn’t going to go away.”