Beijing's surprise decision to unshackle its currency has handed the United States a symbolic victory and an edge in trade, but will not fix the stubborn problem at the heart of a global imbalance: Americans spend too much and the Chinese not enough.
Coming just days before the Group of 20 summit in Toronto this week, China’s announcement appeared timed to take the thorny currency issue off the table and defuse simmering trade tensions between Beijing and recession-weary United States. It may also help cool inflation in China.
And, initially Monday, investors believed the decision to allow the yuan to appreciate would quickly make a difference, as they bid up stocks, commodities and some currencies. The yuan rose to a record high of 6.7971 from 6.8272 yuan on Friday. That’s a move of 0.4 per cent and an abrupt break from the range of 6.83 yuan to U.S. dollar that had held since mid-2008.
But the enthusiasm fizzled in less than one trading session. The Dow Jones Industrial Average fell 8.23 points to 10,442, erasing an earlier 100-point gain.
The sober reality is that massive financial imbalances are likely to continue dominating the global economy.
“The bottom line is that Americans don’t save enough,” said Drummond Brodeur, a vice-president and portfolio manager at Signature Global Advisors in Toronto. “China is the largest provider of savings to the world. Unless Americans save more, the United States is going to have to run a current account deficit.”
The yuan’s modest appreciation may be easily swamped by other, more entrenched economic forces.
The broader problem is the enormous gaps between China and the United States in wage rates, standards of living, savings and consumption. Those stark differences in two of the world’s most important economies figured prominently in the financial crisis, as many U.S. homeowners and consumers were exposed as too reliant on debt to finance their purchases. Many financial institutions were similarly overleveraged.
