Currency float

0 CommentsPrint E-mail China Daily, June 21, 2010
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China's decision to make its currency, the renminbi, more flexible, speaks volumes about its determination to speed vital changes to its growth model in order to ensure sustainable development.

Many world leaders have been quick to welcome the exchange rate pliancy as a constructive step that will promote balanced global economic recovery.

However, if they cannot make good use of the coming G20 summit to press ahead with the much-needed overhaul of the global financial system, the international community will soon find to its disappointment that its leaders look only for red herrings, rather than real solutions, at a time when true leadership is badly needed.

The People's Bank of China issued a statement Saturday saying the time was ripe to proceed with the reform of the renminbi exchange rate regime and increase the Chinese currency's exchange rate flexibility given the strong economic rebound at home and the gradual recovery abroad.

Domestically, by allowing the renminbi exchange rate to reflect market supply and demand with reference to a basket of currencies, Chinese policymakers have sent a clear signal that the country cannot wait any longer to shift away from its heavy dependence on exports for growth.

It will definitely not be easy for Chinese exporters hit by the double whammy of weak global demand and rising domestic labor costs to adapt to a stronger Chinese currency.

Yet, the country's need to pursue consumer-led growth has made it more compelling for its currency to strengthen, which can increase the buying power of its consumers and help curb inflation by reducing the cost of imported goods.

China's decision to make the yuan more flexible in a controlled and gradual manner is a laudable first-step in rebalancing growth keeping in mind the country's long-term development agenda.

However, for a stronger renminbi to work its magic and significantly boost domestic consumption, Chinese policymakers should understand that the country's widening income disparity must also be properly addressed.

Internationally, it remains unclear whether the latest move will significantly rebalance the global trade picture as some people have predicted.

The international community may have yet to fully appreciate the contribution China made to mitigate the worst global financial crisis in more than half a decade by maintaining the stability of its currency exchange rate against the US dollar.

As the Chinese currency starts becoming more supple, it will soon become apparent that making the exchange rate the scapegoat for, or the solution to, the current global crisis, is not going to work.

G20 leaders have so far given outsize emphasis to finding an easy way out of the crisis. Will they show flexibility at this week's meeting to do an about-face on global financial reforms? That remains to be seen.

They must at least now realize that it is time to stop tinkering at the edges of an out-dated international financial system that has increasingly failed to safeguard the value of currencies worldwide.

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