Yesterday the yuan edged higher against the dollar as the first installment in China’s new approach to its currency after a period of pegging it to the dollar. Although the move was small, it was important. There are no guarantees of a big revaluation, and no suggestion that China will move to an unmanaged rate. However, it was important because at last we have a substantial world currency which the authorities do not wish to see fall.
Over the last couple of years the US and Uk authorities have been at best unmoved by declines in their currencies, and at times appeared to be grateful for any fall. In more recent months the Euro area has seemed relieved that its currency has started to fall against others. All the major countries have kept interest rates very low, putting people off holding their currencies and short term bonds.
The world remains divided between the hard working, high saving, successful exporting economies, and the heavily indebted, high borrowing, big importing countries. Japan has some mixed characteristics, China leads the former group whilst the US, UK and peripheral Euroland are in the second group.
To create greater balance, behaviour – and costs – have to change in both groups to level things up. Changing currency values can do some of that work for the relevant governments. China has put a new safety valve into the world economy. We need to watch the extent they allow it be used. Meanwhile the rupee has gone up reflecting India’s economic success, and taking a ltitle of the large inflationary pressure out of the Indian economy. These revaluations are Mr Osborne’s stroke of good fortune as he picks up a very difficult inheritance.