China Plays Obama like Violin on Yuan Exchange Rate

You have to hand it to China for the way it played Obama like a violin. On Thursday and Friday China Warned Against Finger-Pointing while announcing the "yuan exchange rate of no concern to others" setting a confrontational tone for the G-20.

Today, China says Dollar peg is dead and vows yuan flexibility.

China on Saturday said it would gradually make the yuan more flexible, in a gesture that may deflect foreign criticism at next week's G20 summit, but will not quickly yield a big move by its currency.

"This is an important move as it signals recognition by Chinese officials that a more flexible exchange rate is in China's own interest and also acknowledges its responsibility to the international community," said Eswar Prasad, a former head of the IMF's China division.

"We believe this is a positive gesture, suggesting the yuan will soon resume its appreciation against the dollar," Goldman Sachs economists Yu Song and Helen Qiao said.

"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability," the Chinese central bank said in a statement on its website.

"It is desirable to proceed further with reform of RMB exchange rate regime and increase the RMB exchange rate flexibility," it said.

Europe Welcomes China's Move

Reuters reports Europe welcomes China's declaration on yuan reform

French President Nicolas Sarkozy said the move was "encouraging" and the European Union's executive said the expected reforms to the exchange rate of the yuan (also known as the renminbi or RMB) should have positive repercussions for the euro zone.

"The European Commission welcomes The People's Bank of China decision to proceed further with the reform of the RMB exchange rate regime and to resume the RMB exchange rate flexibility," it said in a statement.

"It considers that such a move will be beneficial for both the Chinese economy and the global economy. The European Commission looks forward to work closely with the Chinese authorities bilaterally and in the G20 to address successfully the current challenges to the global recovery."

Russian Finance Minister Alexei Kudrin also welcomed the move but said that it would not have much impact on Russia's economy or trade between the two emerging economies.

Geithner Urges ‘Vigorous’ Action

Treasury Secretary Tim Geithner is also in on the love-fest while Urging ‘Vigorous’ Action After Yuan Decision

U.S. Treasury Secretary Timothy F. Geithner called for “vigorous” action on China’s pledge today to allow more currency flexibility, and a leading Senate Democrat demanded more details within days to prevent Congress from pursuing trade sanctions.

“This is an important step, but the test will be how far and how fast they let the currency appreciate,” Geithner said in a statement today in Washington. “Vigorous implementation would make a positive contribution to strong and balanced global growth.”

China signaled an end to a 23-month peg to the dollar that has drawn international criticism and fueled threats of retaliation from U.S. lawmakers including Senator Charles Schumer, who argue that holding down the yuan’s value unfairly favors Chinese exports. Geithner has urged China to allow the yuan to appreciate, saying the peg is an impediment to the global recovery.

Schumer, vice chairman of the Joint Economic Committee of Congress and co-sponsor of legislation that would allow for duties on Chinese imports, said he was dissatisfied with a Chinese statement that didn’t indicate the timing or amount of a yuan adjustment.

“We hope the Chinese will get more specific in the next few days,” Schumer said. “If not, then for the sake of American jobs and wealth, which are hurt every day by China’s practices, we will have no choice but to move forward with our legislation.”

China got exactly the praise it wanted from US and European leaders in exchange for essentially nothing.

China did not agree to a timetable or an amount. In essence it was a hollow statement. By acting extremely tough, then throwing Obama a bare bone, it made it appear as if the action was meaningful.

It wasn't. I am not in favor of tariffs but I expect to see Schumer pressing ahead with protectionist legislation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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