Yuan: Beijing has got away in the past by making some well-timed baby steps to neutralise foreign pressure to boost the value of the yuan. But putting the Chinese currency on a small appreciation burst ahead of US Treasury Secretary Timothy Geithner's testimony on Thursday - the currency has risen 0.7 per cent in the past week - isn't likely to do the trick this time. Bolder actions are required to avoid real punishment.
US politicians are increasingly seeing China's symbolic moves as what they are. Geithner will say the yuan’s appreciation pace has been too slow. After rising 0.6 per cent in June, the yuan gave up most of its gains in August. US lawmakers feel they are being played with and have therefore prepared bills that could authorise Washington to slap duties on Chinese imports.
The yuan reform in June had some good elements. The idea was to allow the currency more flexibility in fluctuating both up and down. That was, in theory, better than the regime of gradual appreciation that was in place between 2005 and 2008. The snag is that the yuan rate is still too low to encourage market participants to engage in genuine two-way trade. The authorities have continued with their habit of intervening in the market to massage the rate.
Beijing doesn't want to be seen to be caving into foreign pressure, but it is running out of options. China escaped a bullet in July when the US Treasury stopped short of labelling it a currency manipulator. But November is shaping up as crunch time. The next semi-annual report is due that month, as is the next G20 summit which could step up calls for concrete steps. Critically, there are also the congressional elections on November 2, which could give free rein to protectionist sentiments.
Beijing's hide-and-seek yuan appreciation strategy doesn’t even help its own goal of rebalancing the economy away from its dependency on exports. The best way forward would be a one-time revaluation - of, say, 2-5 per cent. That would be a more meaningful move than the recent baby steps and avoid a nasty bust-up.
