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The renminbi has been pegged to the US dollar since 2008 to protect exports

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littlekracker


The renminbi has been pegged to the US dollar since 2008 to protect exports
By Edward Helmore
LAST UPDATED 7:37 AM, MARCH 8, 2010

Anticipation is building that China is preparing to revalue its currency, widely believed to be significantly undervalued since it was pegged to the dollar in mid-2008 to protect exports.

Over the weekend, Zhou Xiaochuan, governor of the People's Bank of China, described the peg as a "special" policy to weather the financial crisis.

A policy shift has yet to be acknowledged at a senior political level yet domestic inflationary pressure is making such a move more likely. The rest of the world is also broadly in favour: President Obama recently acknowledged a revaluation might create "hundreds of thousands, maybe millions" of new jobs in the US.

But how likely is it that the Chinese leadership will allow its currency to float free? Not very, is the sum of opinion.

According to New York University professor Nouriel Roubini, China will cap any appreciation at 4 percent over the next year. "They will move by a token amount," he tells Bloomberg. Compared to 2005 when Beijing allowed the renminbi to inflate 21 percent, "the world is much cloudier in every dimension. They are super cautious." Others, like Jim O'Neill, the chief Goldman Sachs economist, believe Beijing will allow a one-time 5 per cent gain.

Even a small appreciation, would be a notable reversal for Beijing, particularly in respect of US-China relations. China has consistently maintained economic tensions between the two superpowers are America's to resolve and it will not bow to pressure from Washington.

Yesterday, Yang Jiechi, foreign minister, said: "The responsibility for the difficulties in China-US relations does not lie with China. The US should take seriously China's position and respect China's core interests."

But perhaps China has been doing the West a favour. A recent report found that - set free - the renminbi would rise 41 per cent. That would suddenly revalue China's economy, making it far larger than Japan's and on track, as O'Neill has predicted, to become the world's largest economy by 2027.

According to the FT, even after a big revaluation, China's spending on research and weapons would still only be a quarter of those in the US. But in other areas, like commercial banking or petro-chemicals, Chinese firms would be significantly larger than their US counterparts.

Should Beijing let its currency rise freely, the US and other Western competitors may need to review what they have long wished for.

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