EDITORIAL: China's currency

China has agreed to be more flexible in allowing the yuan, also known as the renminbi (RMB), to appreciate against foreign currencies. This must not simply be a stopgap measure to alleviate friction between China and the United States. We hope this marks the first step toward a more balanced situation for China and the entire world.

The renminbi was allowed to appreciate in 2005, and, following a gradual rise, it was effectively pegged to the dollar. This was because China feared the effects of the financial crisis would dampen Chinese exports. However, the decision to keep the RMB exchange rate artificially low not only irritated the United States and other major economies, but also led to inflation in China and the emergence of a real estate bubble.

While international pressure no doubt influenced China's decision, the latest announcement means that the Chinese themselves finally realized the necessity of the move. In this sense, the Chinese authorities' decision to allow the RMB to appreciate came too late, but was totally appropriate.

The European financial crisis has weakened the euro, and the RMB-to-euro exchange rate has drastically grown stronger. For China, the European Union has become the largest market for its exports, surpassing the United States. For this reason, some in the Chinese government were anything but enthusiastic about allowing an appreciation that could further impede exports.

However, it was inevitable that China would come under pressure to allow the RMB to rise. This will be a major topic at the Group of 20 summit due to start June 26 in Canada. Announcing an end to the dollar peg was a political move intended to ward off those pressures.

The U.S. government had been pushing the Chinese to allow the RMB to appreciate one way or another. So in response to China's statement Saturday, it immediately released a statement lauding the move.

China's central bank can still intervene in the yuan market to regulate the exchange rate. So, if the appreciation is too small, the frustration of countries like the United States will not dissipate. It is also disconcerting that while the People's Bank of China signaled its decision to allow more flexibility, it pointedly noted that China's current account surplus to gross domestic product rate is falling. The bank said there are no grounds for "large swings" in the currency.

While a rapid appreciation may hinder economic growth, a gradual and substantial appreciation of the RMB is inevitable as China needs to import cheap resources, fuel domestic demand and continue sustainable growth. China has much potential for growth. Although the RMB rose by some 20 percent against the dollar during the three years from 2005, China managed to chalk up a record 10-percent growth.

There is no need for China, which will soon surpass Japan to become the world's second-largest economy, to develop a "strong yuan" phobia. Rather, if the appreciation of the RMB slows without good reason, then there will be no way to stop either inflation or the expansion of the asset-inflated economy. As a result, or in reaction to it, China's economy will suffer, and the damage will spread throughout the world.

--The Asahi Shimbun, June 21