The Chinese government has announced that it will allow its currency, the Renminbi, to float against a basket of world currencies and appreciate in value compared to the dollar. While the somewhat nebulous Chinese announcement suggests we shouldn't expect a massive change, the fanfare around the news is a reward for U.S. policy-makers who have been carefully encouraging such a move for over a year now.
Allowing the Renminbi to appreciate will make Chinese goods more expensive on the global market, working to eliminate what many in the U.S. say is an unfair and artificial advantage for China's export-driven economy. That, in turn, ought to benefit U.S. manufacturers. The decision should benefit the Chinese as well: Most observers agree that China's current economic strategy is not sustainable and that the country should focus more on cultivating internal demand and improving living standards rather than protecting their export sector. That is, of course, far easier said than done, but allowing currency appreciation is a first step toward the trend economic folks call global re-balancing.
If the new Chinese policy results in significant changes, it would be the first major result of the Obama administration's unprecedented engagement with China, which, unlike other unprecedented things it has done, is actually rather novel in its depth and comprehensiveness.
The move may also make it harder for the U.S. to borrow and highlights the need for looser monetary policy in the major developed economies.
-- Tim Fernholz