China is signaling a change on the yuan. Why?

There’s been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar.  Keith Bradsher’s latest in the New York Times has the most detail, so let’s look at his story:  The Chinese government is set to ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

There's been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar.  Keith Bradsher's latest in the New York Times has the most detail, so let's look at his story: 

The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday....

The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.

There’s been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar.  Keith Bradsher’s latest in the New York Times has the most detail, so let’s look at his story: 

The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday….

The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.

The emerging consensus within the Chinese leadership comes as Treasury Secretary Timothy F. Geithner held meetings on Thursday with senior Hong Kong officials and prepared to fly on Thursday evening to Beijing for a meeting with Vice Premier Wang Qishan. 

Now, given the degree of hostility between China and the United States as late as last month, we have to ask the question:  what caused the shift in China’s policy?  Bradsher provides multiple answers: 

China’s commerce ministry, which is very close to the country’s exporters, has strenuously and publicly opposed a rise in the value of China’s currency over the past month. But it appears to have lost the struggle in Beijing as other interest groups have argued that China is too dependent on the dollar, that a more flexible currency would make it easier to manage the Chinese economy and that China is becoming increasingly isolated on the world stage because of its steadfast opposition to any appreciation of the renminbi since July, 2008….

People with knowledge of the policy deliberations in Beijing said that Chinese officials had made the decision to shift the country’s currency policy mainly in response to an assessment of economic conditions in China, and less in response to growing pressure from the United States and, less publicly, from the European Union and from developing countries.

So, what’s going on?  First, it’s possible that the policy shift will just be a token move.  I’m confident that China won’t appreciate as much as, say, Chuck Schumer wants.  That said,  this doesn’t sound like a token-y move. 

If China’s shift is a real one, there appear to be three possible sources of change:

1)  Domestic factors and actors convinced China’s leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;

2)  China responded to mounting multilateral pressure and feared being isolated at the upcoming G-20 meetings. 

3)  China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war;

These are not mutually exclusive arguments, and we might never know exactly what caused China’s .  But for the record, I think (1) and (2) maqttered a hell of a lot more than (3).  That said, I can’t rule out the possiblity that their antics helped scare China into action. 

Yuan hawks like Paul Krugman and Fred Bergsten have been very silent as of late.  I’ll be veeeery curious to read their reactions to this latest turn of events. 

Am I missing anything? 

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University, where he is the co-director of the Russia and Eurasia Program. Twitter: @dandrezner

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