Well played
China's hapless soccer team might not have qualified for the World Cup, but when it comes to playing the game of global politics, its leaders have shown considerably more finesse. So while China's soccer players are polishing their boots, its economics A-team is on the way to Toronto for the latest summit of the G20. There have not been this many Chinese faces arriving in Canada since Hong Kong's reunion with the mainland.
One week ago, it looked like the latest meeting of the world's self-appointed high council on the financial crisis would be a festival of China bashing, with the exchange rate the main focus of attention.
Back in April, when the US Treasury delayed publication of a critical report on China's exchange rate regime, the unspoken trade-off was that China would start the yuan-appreciation ball rolling ahead of this week's powwow. The attack dogs in the US Congress latched firmly onto that informal deadline, threatening that if there was no movement on the exchange rate by the G20, they would take matters into their own hands. If China had not acted last weekend, the US would have been compelled to go on the offensive in Toronto.
The European debt crisis has Brussels gazing at its own bureaucratic navel. But with emerging markets like Brazil and India adding their voices to the paean of protest, and rumblings of discontent from East Asian neighbours, China looked set to find itself isolated at the international negotiating table.
By signalling the end of the yuan's 22-month peg to the US dollar, China has done just enough to calm the storm. In the few days that have followed the announcement, the yuan has moved little. A 0.2 per cent appreciation against the dollar will hardly be enough to bring the competitive shine back to manufacturers in the US rust belt.
But China has won itself the benefit of the doubt. The same voices that were, last week, raised in protest are now offering a cautious welcome for Beijing's promise of increased flexibility. The US Congress remains on the war path. But China has given the Obama administration the fig leaf it needs to justify its softly-softly approach to dealing with Beijing, and done just enough to ease tensions in relations with other emerging markets.
Leaders in the United States and elsewhere want China to translate its words into actions - they want real change, not just a commitment to change. But, for now, Beijing has moved the exchange rate to where it wants to be - off the G20 negotiating table.
A careful examination of the fine print in Beijing's announcement on exchange rate reform, however, suggests that the US would be well advised not to allow the yuan to slide too far from view.
China's trade surplus might have come in at a tidy US$198 billion last year, but that was way down from almost US$300 billion in 2008. Beijing has taken this as evidence that the trade account is coming close to balance of its own accord, and the need for further adjustment of the exchange rate is limited. The announcement also makes clear that what adjustment there is will be gradual, to give the export factories of the Pearl and Yangtze river deltas time to adapt. When it comes to exchange rate reform, 'limited' and 'gradual' are not the words that Washington wants to hear.
Even more alarming for the US, China has made it clear that, in the future, the direction of travel for the yuan against any particular currency could be down as well as up. The new plan for the yuan might mean continued stability, or even depreciation, against the dollar, at the same time as the currency appreciates against the euro, the Brazilian real or the Indian rupee.
If Brussels, Brasilia and New Delhi find the yuan's new flexibility means appreciation against their own currencies, they will see little reason to support the US on the need for appreciation against the dollar. By conceding to US demands for enhanced flexibility of the exchange rate, China might have succeeded in turning the international consensus on the need for yuan appreciation on its head. If it is the US that finds itself isolated at the negotiating table at the next G20, scheduled for South Korea in November, it might regret missing an open goal in Canada.
Tom Orlik is the China analyst for Stone & McCarthy Research Associates, based in Beijing
