We need more from China than a flexible renminbi

China’s decision to restore the crawling peg for the renminbi after a two-year fix was cleverly timed. Sandwiched between the US-China Strategic and Economic Dialogue forum last month and the forthcoming Group of 20 meeting in Toronto, the announcement at the weekend will spike the guns of the US, where pressure for trade sanctions has been building. It will also shift the G20 focus away from the renminbi to the subject of global imbalances, where many countries see the US as more to blame.

Yet while Beijing’s move has received much fanfare, especially in excitable financial markets, a more sober assessment is needed. This was first and foremost a political, not an economic, decision, with symbolic rather than substantive consequences.

Think back three months. In March, the US, UK, France, Canada and South Korea wrote a formal rebuke to China to complain about backsliding on several matters, including exchange rate policy. Strong pressure was building in the US Congress to label China a currency manipulator, which would have resulted in more formal trade sanctions and a hearing before the World Trade Organisation. Tit-for-tat trade tariffs between the US and China had become almost commonplace, and hostility was building over other issues, including US weapons sales to Taiwan and the Dalai Lama’s visit to the White House.

Someone then blinked, for there followed a series of confidence-building moves. The US Treasury postponed the mandated annual report to Congress, which could have labelled China a manipulator, President Hu Jintao went to Washington to attend a nuclear non-proliferation summit and China instructed its diplomats to participate in UN Security Council discussions about sanctions against Iran, to which they subsequently agreed.

The timing was clearly now propitious for a move on the renminbi. But what does it mean? The fact that the People’s Bank of China announced the decision is revealing. This is not to diminish the central bank, but it fulfils a largely technocratic function. Had the State Council or a top party official announced the decision, its significance would have been greater.

There is no transparency about how the new policy will work, and few think the renminbi will be allowed to increase by more than about 5 per cent, if that, over the next six to nine months. US Congressional pressure for action against China may dissipate for now, but not for long. Moreover, even limited currency appreciation could stall in the face of pressure from export companies, especially if global growth slows now that Europe is embarking on fiscal retrenchment and the US recovery is flagging.

It would be churlish not to acknowledge that a more flexible renmbini is unequivocally a good thing. But China is not really interested in meaningful changes in the currency regime. As I argued on this page earlier this year, an excessive and politicised focus on the exchange rate deflects attention from three areas where enduring changes are needed.

First, China’s creditor status necessitates that it also takes responsibility for fixing global imbalances, especially as the west has been increasing its savings. Creditor countries that back away – such as the US in the 1920s or Japan in the 1980s – do the world, and themselves, no favours.

Second, imbalances will not go away so long as China has an entrenched savings excess – the product of an unreformed rural sector, the urban citizen registration system, immature social security and financial systems, and the one-child policy.

Third, the renminbi regime matters not so much because of any particular degree of undervaluation, but because it sustains an economy wedded to underpriced capital, excessive credit growth and artificially low interest rates. It is not inconceivable that the inflation genie is already out of the bottle and will have to be put back with a more assertive credit tightening that may be incompatible with a tightly controlled exchange rate.

I doubt that this smart, diplomatic renminbi policy shift is anything more than that. Certainly, it should not be taken as a sign that reforms to lift domestic demand are imminent. The one thing it might reflect, however, is that amid economic hubris China can also show some political humility – and that is worth nurturing in a fractious global economy.

The writer is senior economic adviser at UBS and author of the forthcoming ‘Uprising: Will Emerging Markets Shape or Shake the World?’