China's fancy footwork

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China's fancy footwork

Far from bowing to international pressure, China's renminbi revaluation shows it is firmly in control of its own destiny

In a continuing dance with the global capital markets, China's government has learnt the steps with admirable speed. The latest sashay even wrong-footed its partner, caught on the hop as the rulers of the People's Republic announced one of their most significant financial reforms to date: the removal of the renminbi peg to the US dollar in favour of a basket of currencies.

That, plus a modest revaluation, brought some self-satisfied smirks from the US and talk in the international press of China having finally bowed to international pressure to revalue its currency.

China has done no such thing. Instead, in one rather clever move, it has achieved several useful aims. First, the immediate 2.1% revaluation, which will barely scratch the paintwork on China's gleaming economic engine or make the slightest impression on America's towering deficits, has nonetheless put paid to the more bellicose US howls for China to adjust its exchange rate. Second, China has demonstrated again that it is serious about its reform programme. Third, and most important, it has cleverly bought itself more time and flexibility in which to continue the reform of its financial system.

How so? Well, the devil is in the detail.

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