I was as surprised as anyone when CNN announced early yesterday that China had decided to float its currency. I had not expected such a move until January, at the earliest. Of course, the devil is in the details. A 2.1% revaluation, coupled with a system that will pemit the yuan to fluctuate only by about 0.3% one way or the other, is hardly revolutionary. The Bank of China, clearly, is hedging its bets against any sudden changes in the market; theoretically, it could “revalue” every 24 hours until Doomsday, or until an Asian currency collapse, whichever is sooner. Other currencies in the region, especially the Yen, will now face increased pressure to do likewise. Malaysia for one, immediately followed suit.
But to what extent does Beijing’s actions constitute an about-face? It has resisted for years the entreaties of various governments and foreign banks to float the Yuan (the currency has been pegged to the U.S. dollar for eight years). The Chinese have a saying about “sweating fear” in one’s own house (something to be avoided, and certainly not to be done publicly if it cannot). Were they worried about Senator Schumer’s threats of an across-the-board imposition of tariffs if they remained inflexible? Or, was it an attempt to (a) insure a “soft landing” for an overheated economy should there be a repeat of the Asian currency crisis of the late 1990s, (b) boost consumption in China and control rapidly growing exports (now growing by an astonishing 30% a year), and (c) send a signal to India and the U.S. in the wake of Mammohan Singh’s Washington visit earlier this week?
My money is on the last three. True, Beijing is interested in reducing tensions with the Americans as it contemplates President Hu Jintao’s visit to Washington in September. Similar feints in the direction of placating intransigent U.S. nationalisms were made prior to Jiang Zemin’s visit back in 1997. Then it was pieties about shipping disputes and labor reforms.
But, now, much more is at stake. China is poised to become a world power, already outstripping the US in “soft power” in much of the world, and making progress in building an efficiently modern military, as well. Some are of the opinion that China does not have to “match” American military might, missle for missle to achieve parity; merely possessing the werewithal to maximize its growing influence throughout the world coupled with armed services sufficiently developed to thwart hostile US objectives in Asia would be enough. Revaluation, on a limited and timely basis, subject to modification or even reversal should exigencies warrant, actually facilitates China policy, both with regard to its growing energy relationship with Russia, and its developing arms industry, which is at present export – oriented. Floating the yuan will also cut the costs of importing energy, a major consideration for China.
For the moment, the practical effect of Beijing’s surprise move will be limited. It will temporarily make American goods more accessible to the Chinese (good news to American manufacturers); it will render more intimate the relationship between Pakistan and China (already drawing closer thanks to Mr Singh’s overtures to Washington), and it will send a message to the U.S. that China, while willing to be flexible, reserves the right to protect its own interests in fiscal policy along with everything else.
In the long run, China will probably come to profit substantially from yesterday’s move. What will the U.S. get? Not much, probably, over the long run, except the short-term appeasement of nationalist appetites and some temporary relief from Beijing’s accelerating ownership of America’s debt. Beyond that, much depends on how Asian economies develop and are merged with those of the European Union and Japan.
America’s star has for some time been diminishing in Asia. China’s currency revaluation, for so long devoutly wished for in Washington, may render inexorable that long-term prospect.