China’s surprise announcement that it will continue floating its currency after a nearly two-year hiatus is catching the financial world by surprise.
After Chinese leaders denied for months they would cave to international pressure, the Saturday announcement by China’s central bank is widely seen as a way to defuse the issue from being raised at next week’s G-20 summit in Toronto, especially since China’s May exports shot up nearly 50 percent year-on-year. But is that the whole story?
China is notorious for playing its cards close to its chest. In an interview with state-run news agency Xinhua in December, Chinese Premier Wen Jiabao said China would “absolutely not yield” to international pressure to raise the trading value of the yuan, which the Peterson Institute for International Economics had claimed was 40 percent under its market value against the dollar at the time. Wen echoed his refusal to budge at the March Chinese parliamentary meeting.
But now, China clearly sees an advantage to floating the yuan. Why?