Tension defused, but the real battle has just begun
As much as being a significant policy statement, Beijing's decision to break the yuan peg to the US dollar and allow the yuan to revalue by some 2 per cent is largely politically motivated.
Both the timing of the announcement and the tiny revaluation have been carefully debated and well calculated.
As many analysts have pointed out, the move - billed as Beijing's first step towards a more flexible currency system - should help defuse some of the political and commercial tensions built up in the past few months, particularly with the United States.
US Treasury Secretary John Snow and the White House have been swift to hail the decision, while US senators who had been pushing for bills to impose penalty tariffs on products unless China revalued also reacted favorably.
This will take political pressure off both President Hu Jintao and his American counterpart, George W. Bush, and help smooth the path towards a summit scheduled for September.
Beijing's decision is most likely to generate more grievances among some mainland officials and academics that the leadership is too soft and too eager to please Washington. But the leadership has apparently seen an urgent need to indicate it wants a more friendly relationship ahead of Mr Hu's visit.
Political relations between the two countries have been marred by US allegations that China's trade practices are unfair and its currency manipulated to artificially boost export competitiveness.
To make matters worse, some US congressmen and politicians have whipped up political opposition to CNOOC's US$18.5 billion bid for the US-owned oil company Unocal into a storm of anti-China fervour.
Adding fuel to the fire, a PLA general warned earlier this month that China should launch nuclear warheads on American cities in the event of a military conflict with the United States over Taiwan. Hence the timing and scope of the revaluation.
Any economist will tell you that in the short term a 2 per cent revaluation will have little effect on the mainland's foreign trade, its economic growth, its banking system, and also on US consumers and producers and Washington's US$160 billion trade deficit with Beijing. Any significant impact can come only in the medium and long term.
As a Chinese proverb goes, it is impolite not to reciprocate. As Mr Hu bears 'this gift' to Washington, shouldn't Mr Bush return something as good?
One thing he could do is to help remove political uncertainties over CNOOC's bid for Unocal. Unocal's board decided to endorse a sweetened US$17 billion offer from Chevron, although CNOOC's bid is still superior at US$18.5 billion. The market consensus has been Unocal's board made the decision because of the political tension.
A more difficult question is whether the move is enough to stop US protectionist pressures. Hardly. Mr Snow has said its implementation will be closely monitored, while US congressmen are likely to want more action, as the fact Beijing moved is a de facto admission that the yuan is undervalued.
But mainland officials have said currency reform will move at its own pace, with the official media suggesting another revaluation is unlikely this year. The battle over the true value of the yuan has just begun.
