If China’s shift is a real one, there appear to be three possible sources of change:
1) Domestic factors and actors convinced China’s leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;
2) China responded to mounting multilateral pressure and feared being isolated at the upcoming G-20 meetings.
3) China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war….
Drezner wonders what he might be missing. How about this? China’s current accounts (balance of trade) has gone into deficit, and while it may be a one-off event, the surplus has been diminishing for some time.
Under those circumstances there is relatively low probability of a significant rise in the yuan, and it might actually drop, and perhaps substantially. There’s no way China could intentionally weaken the yuan, but if the market did it for them — after they’d acceded to America’s wishes in the matter — it could keep more Chinese peasants employed making stuff for American peasants.
Question: would devaluing the yuan help or hurt U.S. debt position with China?
[blockquote]the yuan fixed and masively undervalued[/blockquote] (sic)
If the yuan is allowed to float, we will see it’s true value, which of course is mostly a matter of perception. Given the impending hyperinflation in the west, that could have a large impact on the balance of trade. (not to mention Wal-Mart’s stock value 😉 )
This could be a step away from China’s de-facto mercantilism, which would be a good thing if it averts a trade war, but will have little effect on the long term internal imbalances and trillions in worthless government-run-bank loans created by the Chinese planned economy model. If China tries to dump their US debt it will inflate the dollar, and effectively terminate their last hedge. These are conditions that ignite world wars.
We are not out of the woods yet. And China won’t admit that they are heading into the woods.
When did Barack Obama start believing unilateral action by America works? Maybe he should start listening to whoever told him to threaten unilateral action on China and stop listening to the idiots who are telling him it won’t work with Iran. I am gathering that since Israel isn’t participating in Obama’s nuclear arms summit, we may be loking at unilateral action by Israel, which will produe one or two minor foriegn policy problems for our president.