It’s wrong to conclude China was browbeaten into acting. Yes, the step means Chinese officials can breathe easier arriving in Toronto for next weekend’s Group of 20 meeting. Yet a rising yuan will make it easier to tame asset bubbles and reduce inflation risks. It also increases the purchasing power for the nation’s 1.3 billion people. Efforts to kick China’s addiction to exports are now underway.
That will require some adjustments for the outside world. A stronger yuan is reflationary. Chinese will, over time, be able to buy more goods from other countries. Increased import activity coincides with a sudden militancy among Chinese workers demanding higher wages.
While good developments in the long run, both phenomena will affect global inflation rates and require considerable nimbleness on the part of multinational companies. The infinite sea of cheap, docile Chinese labor is evaporating.
Japan is a fascinating case in point. Barely two weeks into his premiership, Naoto Kan
is raising many an eyebrow by warning that Japan risks going the way of Greece. Such hyperbole is needed to wake Japanese politicians out of their two-decade slumber. While they snoozed and saved their jobs, Japan amassed the biggest debt in the developed world and failed to find an exit strategy from zero interest rates.