Recently the head of China’s central bank, Zhou Xiaochuan, made comments that drew less attention than they deserve. First Governor Zhou suggested that market forces would play a bigger role in setting the value of China’s currency, the yuan or renminbi. Then he mused that the yuan should rise further against the dollar and on foreign exchange markets generally.
There is room for two responses to this seemingly new Chinese position, one cynical and the other much more positive and hopeful.
For more than two decades, China’s relentless adherence to this policy has led Beijing to resist all pressure for yuan appreciation, whether from the United States, the European Union, or others. Beijing’s leadership set the tone in the early 1990s. In 1993, when Under Secretary of the Treasury Larry Summers demanded currency revaluation on behalf of President Clinton, Beijing, far from bowing, devalued the yuan not six months later, and by a massive 60%.
It then locked the currency in at that cheap price against the dollar. The move undercut pricing in most of the rest of Asia and ultimately contributed to the Asian crisis of 1997-98, commonly referred to as the Asian Contagion. It was not until 2005 that Beijing allowed some upward movement in the yuan’s foreign exchange value, and even then it kept tight control, allowing only the most frustratingly slow and slight appreciation.
Still, cynicism aside, Governor Zhou’s comments may well contain a more positive forward-looking aspect. Most encouraging is the link he made between the yuan’s value and China’s now clear efforts at internal development.
Beijing has come to recognize the vulnerabilities of export-oriented growth policy, especially after the 2008-09 global recession. It has begun to think increasingly about internal development as a second engine of growth and as a way to spread the benefits of economic development and avoid social unrest. As papers posted on the Websites of China’s central bank and government make clear, Beijing realizes that the country cannot look to increase its global export share over the next 20 years at the same rate as it has in the past.