China's renmimbi revaluation

On the 21st June, the Chinese announced that they would loosen the RMB tie with the dollar. This first happened in July 05, when the fixed peg of 8.28 against the dollar was abandoned. By the end of 2008, the RMB had appreciated to 6.83, when the turmoil of the financial crisis persuaded the authorities to hold the RMB at that level for the time being in the interests of stability. The recovery in the global economy in 2009 and the implementation of a domestic stimulus package resulted in an economic boom in China with GDP reaching 11% in the year to March 2010. Despite this, the Chinese still managed to run a large, albeit declining, trade surplus with the rest of the world. With the US still running a large trade deficit, the Americans put China under pressure to allow further RMB appreciation. The whole issue became political and the essential point got lost in diplomatic dialogue between the two countries. This is that it is in China’s domestic interests to allow the RMB to appreciate. China is the mirror image of the problems of the Euro-zone. The peg with the dollar implies that China and the US are running similar monetary policies, but the domestic demands of each economy are very different (as is the case with Greece and Germany). China is booming and the US is struggling, meaning that they need very different monetary and exchange rate policies. It is the need for an independent monetary policy that is domestically determined that should drive China’s exchange rate policy and is very much in her long term interests. The fact that she has relented is good news from everyone’s point of view. It is a pity that the Europeans cannot resolve their own economic contradictions so easily.