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China's announcement that it will introduce more flexibility into its exchange rate is a deft political move amid rising international criticism of Beijing, but the economic implications are much less certain, said an article in the Financial Times on June 20.
According to the article, as criticism of China's undervalued currency has been on the rise, China's announcement, which comes a week ahead of a G20 summit in Canada, was good timing to divert the world's attention. "By indicating that the peg between the renminbi and the US dollar was now likely to be broken, Beijing had 'stolen the thunder' from the US and other governments that hoped to use the summit to put pressure on China," Eswar Prasad, a former IMF China economist now at Cornell University, was quoted as saying. "They have taken the issue right off the table for the G20 and can refocus attention on what they see as the real problem for global financial stability -- rising government debt in the advanced economies, especially the US."
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Given the context that China's exchange rate against the euro has already appreciated 15 percent and China's current account surplus has witnessed a sharp drop, there will be no drastic fluctuation in the value of the yuan, added the article.
Andy Rothman, an economist at CLSA in Shanghai, said in the article that he expected appreciation against the US dollar in the short term of 0.2 percent a month -- well short of the likely level needed to appease critics in the US and elsewhere. Li Daokui, an adviser to the Chinese central bank, said the greater "flexibility" in the exchange rate could potentially include occasional periods of depreciation against the dollar.