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Kevin Rafferty

Beijing has been sending apparently mixed messages about the value of its currency.
On Friday, China's point man for this week's Group of 20 (G20) summit in Canada delivered a stern 'hands off' message to the world leaders, declaring that the exchange rate was a matter  for it alone to decide.
But the very next day, the People's Bank of China changed the country's tune and promised greater exchange rate flexibility. 
'China's central bank has decided to promote the reform of the yuan exchange rate mechanism and strengthen the flexibility of the exchange rate,' its website said.
No sooner had a chorus of US President Barack Obama, US Treasury Secretary Timothy Geithner and the European Commission praised the new Chinese flexibility than the central bank dashed any hopes of real changes quickly by declaring on Sunday,  'There is at present no basis for major fluctuation or change in the yuan exchange rate.'
Nevertheless, Beijing's promises had stock market and foreign exchange punters licking their lips. Stock markets in Japan and Hong Kong rose  2.4 per cent and 3.1 per cent, respectively, and yuan forward rates strengthened  1.3 per cent to 6.6237 per US dollar yesterday. 
But  the PBOC did not budge and set the daily yuan reference rate at 6.8275 to the US dollar, unchanged.
It is hard not to be cynical and to see China's various statements as directly related to the G20 summit in Toronto. 
Beijing started  by pre-emptively  warning the rest of the world sternly that it had no right to discuss China's currency. Then, as a sop to the US and others pressing for China to let the yuan appreciate, Beijing offered the prospect of exchange rate flexibility, without giving any details as to timing or mechanisms. 
The interesting question is whether Obama and Geithner were hoodwinked in applauding China's new-found flexibility or whether they were playing along in a big cynical game to head off rising US criticism of China's yuan policy. 
In the last few weeks, big US corporations, backed by some influential senators threatening legal sanctions, have resumed their angry contention that the undervalued yuan is penalising their exports.
Beijing's retort is that its policy of a steady exchange rate has been beneficial to the global economy. 
It has been for China, but less so for the rest of the world. 
On China's wider point, that the G20 summit should not be the arena for exchange rates, the G20 has hardly had any history to set any precedents. The G7, as the effective predecessor body of the global economic powers, spent endless hours discussing foreign exchange rates, with, at various times, the so-called strong US dollar and the allegedly damaging weakness of the yen on the front line. 
Reporters scanned not only the words but also the placing of commas in communiques for clues as to whether the G7 would initiate action to push forex markets.
Beijing claims that its exchange rate is  a matter of sovereignty.  But since the exchange rate sets the price at which countries export and import goods from other countries,  the exchange rate is by definition an international trading issue. 
The lesson of the G7 is that China does not need to worry, since even the smaller, more homogenous G7 could rarely get its act together to agree to currency intervention. 
So what chance is there that the much more assorted membership of the G20  will be able to agree on a common position on contentious currency rates? 
Indeed, the G20 as the new directorate of the global economy is too diffuse, with too many different countries, some of which should not be there, notably Canada and the Europeans, who should be represented by the EU.
The real tragedy of the endless argument about the yuan is that it is being abused to make political points.  Even if and when China does permit a float,  it will be carefully managed,  with no danger that the speculators will be able to deploy their trillions of dollars in a bet on the yuan. 
Beijing is right to claim that it is impossible to plan for an economy if the currency is 6.83 against the dollar today and sent to 6 tomorrow, maybe 5.5 the next day and 5.8 the day after that, as traders play their games. 
Americans are also wrong to expect that an appreciating yuan would allow them to move in and grab a big chunk of the China market that they have been missing so far.
In the first place, big US companies like Walmart and GM are already in China and taking advantage of low labour costs and the stable yuan to export. Secondly, exporters from places like Brazil, India and Vietnam would probably prove more competitive if the yuan appreciated.
Cynics like Yves Smith of Naked Capitalism say that if China changed its basket of currencies to give greater weight to the euro and then allowed the yuan to float, it might actually be devalued  against the greenback to account for the appreciation of the yuan against the euro that has already taken place.
China's attitude today is a far cry from the world of a generation ago, when a devaluation was seen as an economic defeat. Countries like India and  Britain lamented a disaster on the economic battlefield when the IMF pushed them to devalue as the price of bailout loans. You might think that China would be celebrating the strength of its economy as witnessed by an appreciating currency.
It  would also make economic sense for China to revalue, as the IMF, World Bank and countless think tanks have urged. An appreciating yuan would help to cool inflation, already 3.1 per cent in May  - higher than the government's full-year target of 3 per cent  - would make imports cheaper and give consumers a chance to enjoy the economic boom that  they have toiled hard for.
The answer is politics, particularly China's politics of exporting. There are signs that the  PBOC would like to see the yuan appreciate, but it has to play second fiddle to the powerful  Ministry of Commerce, the protector of politically well-connected exporters, some of whom operate on wafer-thin margins  that would not be acceptable anywhere else in the world.
It remains to be seen how long it will take for China's leaders to understand that a low-wage, low-value yuan economy with massive exports and mounting foreign exchange reserves held in vulnerable US dollars and euros is not a fruitful or sustainable  path for a developing country. 
Perhaps recent labour unrest, carefully tolerated at foreign-owned factories, will make the point that China has to go upmarket with higher wages and greater productivity. 
The hope might be that the  central bank was trying to make the point to its own country in its tortuous promises of yuan flexibility.
Kevin Rafferty is a former managing editor at the World Bank



Mixed signals on yuan from Beijing