Q and A: What does China’s exchange rate change mean?

Tim Wallace
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Q What has happened to China’s currency regime?

A The People’s Bank of China has allowed its currency more flexibility to rise and fall against others. Until today, the currency could move 0.5 per cent against a basket of the currencies of the country’s main trading partners – largely made up of the dollar, yen, euro and South Korean won.

Q What do currency controls do?

A Other major economies allow their currencies to float. When those countries export more than they import, the demand for their currency rises and its price increases, making imports cheaper and exports more expensive, dampening the export-led economic boom. With currency controls, that has only been allowed to happen slowly – despite the economy booming, currency controls kept it weak.

Q Why has this happened now?

A Controls have gradually been loosened allowing the renminbi to appreciate by around 30 per cent since 2005. However, it was always carefully managed to prevent a sharp appreciation hitting exporters’ competitiveness. Now the economy is growing more slowly, after years of controlled appreciation, it seems the authorities are less worried by the risk of a rapid rise that would hit economic growth. That also means British shoppers should not expect Chinese goods to suddenly become more expensive.

Q What do other countries think?

A The US has long complained the Chinese authorities manipulate their currency unfairly, so this should dampen their opposition for now. Indeed, the China’s news agency, Xinhua, said the move could “deflect criticism” at the IMF meeting this week.