Cautious Optimism: China Signals It Will Gradually Let Its Currency Appreciate

The proverbial pigs are checking their flight plans for take off – why you say, it’s on account of, according to the New York Times, the Chinese, through its central bank, contemplation of gradually allowing its currency, the Yuan to float - this is what Chinese told the world Saturday.

I have written about this in a past blog, but there are pertinent data to add and this epochal change on the part of the Chinese is germane to the issue because of this monumental shift by the Chinese in an important monetary policy. There are ramifications when and if the Chinese take this unprecedented step, not only for China, but for the rest of world’s economies. If what the New York Times is reporting concerning the Chinese change of posture is true, this will be the talk and focus of the upcoming G-20 meeting. The floating of the Yuan, in addition, has political ramifications for America and the Obama administration.

The constant refrain of asking and threatening the Chinese to float its Yuan, if undertaken, bodes well for America’s exports, making them more competitive against the usual cheap Chinese imported products. The Chinese of course has been reluctant for such a long time to float its currency because it benefited it exports.

How many times have we heard the reports of trade deficits, detailing the wide divide and disparity between the Chinese and America’s imports/exports. How are the American manufacturers to compete, with the dollar exchange rate being much higher than that of the Yuan. Economist points to our repetitive trade deficits on the fact that the Yuan may be some 40% undervalued, an undervaluation deliberately and artificially set by the Chinese Central bankers. There are those on Capitol Hill who think that Congress’ threats of taking punitive actions against China, say like the increase of tariffs on some of its goods, might be the impetus for the change desired by past administrations and Obama’s.

The Indians and the Europeans are cautiously rejoicing too because they too see the economic benefits of China’s willingness to float its Yuan. Now all these countries respective currencies can have a semblance of competition, competing in the market place, which has ramifications for jobs, imports, exports, and the foreboding economic boogieman, inflation. I truly hope that we are not counting our chickens – concerning the Chinese promise to float its currency - before they are economically hatched.