Statement of purpose

Chinas central bank said on Saturday that it would allow Chinas currency officially known as the renminbi,but denominated as the yuan to become more flexible,ending its 23-month-long peg to the dollar,in which the yuans value closely tracked that of the dollar. The peg was introduced mainly to aid that countrys huge export sector deal with the global slowdown; the reason given for ending it was that the economy has improved. That and subsequent statements did,however,rule out the one-time revaluation that many worldwide were urging and expecting: they announced no timeframe for implementation,and said both that the daily limits on currency trading would stay,and that the yuan should remain stable because there was no basis for a sharp appreciation something most economists disagree with. (The last time a peg to the dollar was abandoned,five years ago,the yuan appreciated 21 per cent in the three years that followed.)

Critics of Chinas currency policy are far from assuaged. US legislators might still move on attempts to censure Chinese firms,even though the White House issued a statement calling it a constructive move. And while it has been persuasively argued that international pressure on Chinese authorities will only get their back up,making ending their intervention in currency markets less likely,the timing of this step just before the G-20 is due to meet is significant.

Chinas decision-makers have long been admired by some for their speed and their policy common-sense. Yet the yuan debate demonstrates there are limits to their action limits perhaps to their willingness to displease interest groups,or even limits to their ability to push through the acceptance of policy change at higher levels,much like problems we occasionally face in India. It is clear,however,that most in authority in that country recognise the perilous consequences of a currency undervalued by perhaps a third: an economy too geared to export,in which proper domestic markets are not allowed to develop,leaving it dangerously subject to the vagaries of external demand. China will hopefully translate this statement into real action,for its own sake,sooner rather than later.