China on June 19 decided to allow greater flexibility in the foreign exchange rate of its currency the renminbi (RMB), or the yuan, which had been pegged to the U.S. dollar for almost two years. The decision's effect is being felt in foreign currency markets. U.S. President Barack Obama called the decision a "constructive step that can help safeguard the recovery and contribute to a more balanced global economy."
Politically, the move by China, which has been criticized by the U.S. and other countries for using an undervalued currency as a means of expanding exports, will help stave off criticism at the G20 meeting to be held June 26-27 in Toronto and prevent the U.S. from designating China as a currency-manipulating country. The movement of the RMB's exchange rate over the long run will have different effects from country to country and each nation and company will need to take steps to cope with a new situation.
China revalued its currency in July 2007 and moved to a managed float regime. In about three years, it appreciated some 20 percent against the U.S. dollar. In the summer of 2008, China pegged the RMB to the greenback to promote exports amid the global financial crisis. Although China succeeded in tiding over the global recession ahead of other countries, its currency policy resulted in a large trade surplus, inviting criticism, especially from the U.S.