The Renminbi Goes Forth

BEIJING – In June, the Peoples’ Bank of China (PBC), China’s central bank, announced an end to the renminbi’s 23-month-old peg to the dollar and a return to the pre-crisis exchange-rate regime adopted in July 2005. So far, however, the RMB’s appreciation against the dollar has been slow. Will the pace of appreciation accelerate enough to satisfy American demands? If it does, will global imbalances disappear sooner?

It is hard to argue that the RMB is not undervalued, given China’s large and persistent current-account and capital-account surpluses. But, despite ending the dollar peg, faster appreciation of the RMB seems unlikely for the foreseeable future.

China’s official position is that, to avoid the negative impact of a stronger RMB on China’s exports and hence employment, appreciation must proceed in an autonomous, gradual, and controllable manner. The current exchange-rate regime, which links the RMB to a basket of currencies, was designed to give the PBC leeway to control the pace of RMB appreciation, while creating two-way fluctuations in the exchange rate against the US dollar in order to discourage speculators from making one-way bets on the RMB.

RMB appreciation should have started earlier and at a faster pace, when China’s trade surplus was much smaller and its growth was much less dependent on exports. Delay has made current-account rebalancing via RMB appreciation costly. And now China faces a dilemma.