Analysts have said for years that China will start to move when it is ready. So why now?
I can think of several reasons that, put together, might have prompted this change in attitude, as evidenced by several headlines that have crossed my desk:
- China is preparing the ground for the RMB as a regional currency, which lowers the demand for the US Dollar as a medium of exchange for world trade (hat tip Ron Liebis). There is the news that HSBC is facilitating trade using the RMB as a medium of exchange.
- China wants to continue to inflate, at least in the short term. When you read through the rhetoric, China is to continue its loose monetary policy despite its high growth. Isn’t loose monetary policy under these conditions inflationary and would tend to devalue your own currency?
- Chinese culture is big on "face". Making this statement ahead of Obama's visit gives the president "face" and shows for US consumption that he is making progress with the Chinese on the currency issue. They are more or less ready to move in any case so making these statements now cost them nothing.
What is not a reason? Tim Geithner’s statement that “I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar.”
Watch the wheels within the wheels of Chinese policy.