Yesterday, the Chinese government acknowledged what has long been apparent - that the renminbi is undervalued and that China's currency regime needs to be changed. Unfortunately, the reforms that were announced are disappointing in several key respects.

Most obviously, the initial move is far too small. By our estimate, the real trade-weighted value of the renminbi is undervalued by 20-25 per cent - far in excess of what is implied by an initial 2 per cent revaluation with respect to the dollar, along with ambiguous statements about "moving to a managed floating exchange rate regime" and "making adjustment of the renminbi exchange rate band when necessary". China has used similar language to describe its exchange rate system for a decade but the emphasis has been on management and stability of the rate rather than flexibility, not to mention floating. But the move to a basket peg is positive and should be applauded.