The Chinese government announced over the weekend that it will take steps to make its currency exchange rates more flexible. For the past two years, the yuan, or renminbi, has been pegged to the dollar at a fixed exchange rate. The move toward a more flexible currency regime will be gradual, as Chinese officials cautioned, but the change was welcomed by foreign leaders and the financial community.

You can read Andrew Batson’s report from the Wall Street Journal here.

The Chinese announcement comes prior to the June 26-27 meeting of G20 leaders in Toronto, where the unbalanced state of the global economy will likely dominate the agenda. Many perceive Beijing’s move as both a contribution to the global recovery and a recognition that China shares (and should exercise) increasing responsibility for the global economy.

Specifically, the unpegging of the renminbi is expected to achieve several economic objectives. First of all, there will be some rebalancing of current accounts between China and its key trading partners, an outcome that will certainly build international goodwill (and, no doubt, some political capital). Secondly, the move is expected to increase the spending power of Chinese consumers, an outcome expected to ease some of the recent labor tensions in China. As many news outlets have reported, China has witnessed a wave of strikes in the past few months, as workers demand significant increases in pay.

So the news sounds great, but how will it all shake out?

The renminbi is unlikely to float free any time soon, and observers caution against expecting a sudden revaluation of the currency. It might be possible that some form of currency band strategy might be employed, or an adjusted peg of some sort. We simply won’t know until the Chinese plan emerges.

I have scratched my head for years at the insistence of US business leaders that deep engagement with China is the key to opening the next great consumer market for American products. It was a dream that didn’t unfold the way many in the US had hoped. China became a source of cheap labor, and a consumer market for its nascent domestic businesses, but the mass market for foreign consumer products didn’t quite materialize.

China’s currency regime supported an export-centric model that brought wealth, knowledge and technology into China, but kept its consumers under wraps. The news of the currency unpegging, coupled with the increasing empowerment of Chinese citizens, might be a sign that China is finally changing. Perhaps soon, US and other western companies might get a shot at the more than 1 billion Chinese consumers they have always dreamed of. If I were a US brand with unfulfilled Chinese market aspirations, I’d be paying close attention to developments in China over the next 12 months. This could be the moment.

But again, we’ll just have to see how it shakes out.

Posted in Global Business
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