The China Currency Syndrome; World leaders would do better to worry less about imbalances and more about whether their own nations are pursuing policies that contribute to global prosperity.
The best that can be said for China's weekend decision to drop its dollar peg and again adopt more "exchange-rate flexibility" is that it may avert a trade war. What no one should believe is that China's move will "rebalance" the world economy or send manufacturing jobs rushing back to America.</br></br>The People's Bank of China asserted that its decision was made in China's own economic interests, and no doubt that's true. But its timing a week before the Group of 20 meeting in Toronto is no coincidence, comrade. China did not want its exchange rate to become the conclave's focus, diverting attention from the failures of U.S. and European economic policies.</br></br>Senator Chuck Schumer and other U.S. protectionists have also been promising a new tariff against Chinese goods if Beijing didn't move on the exchange rate. And this time the New York Democrat seemed to have corralled such key party colleagues as Max Baucus, chairman of Senate Finance, and Sander Levin of House Ways and Means as his Smoot and Hawley.</br></br>Given the Democratic panic about their November election prospects and President Obama's ebbing political authority, a protectionist mistake from the U.S. Congress cannot be ruled out. China's move reduces the odds of such a blunder, at least in the short run, and that should help the fragile world recovery.</br></br>We say "short run" because China's decision won't end the global demands for a revalued yuan. The People's Bank of China statement made clear that a big one-time revaluation is not in the offing, and the band in which the currency trades daily will not be widened. U.S. Treasury Secretary Timothy Geithner immediately responded that China's move "is an important step but the test is how far and how fast they let the currency appreciate." Mr. Schumer demanded even more aggressive revaluation and said he'll still try to move an anti-China trade bill.