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25 june 2010, loosening up

I have some experience of lobbying on the chinese currency (the remninbi, or yuan), having done a lot of the analysis underpinning a groundbreaking visit of the european "trio" to bejiing in 2007, although that was but a pale shadow of the hugely successful american version. Neither though succeeded in their primary goal, which was to loosen up china's holding down of its currency. That was finally announced this week - apparently. The reason for this is that china, sitting on vast foreign reserves and with huge investment flows risks inflation. Letting the currency rise is like releasing a pressure valve, which also encourages both growth in its own consumer market ("export to china !") and more shopping abroad, as their currency is stronger ("we want chinese investment !"). These effects though will come through only slowly, as the transformation is not all it seems. The yuan will not float, it is managed and, as with most things, the chinese central bank's hand is slow and steady. This will not fix the global imbalances at the heart of the financial crisis overnight, or at possibly at all - and anyway, is the west really comfortable with china becoming the engine of the world's economy and its firms' customers of choice. As the proverbial old chinese proverb says, the bird does not sing because it has an answer, it sings because it has a song. As for thoughts on the uk budget...

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