After years of complaints from U.S. manufacturers, Beijing surprised the world July 21, 2005, when it said it would let its currency rise and fall based on a vaguely defined basket of currencies and market forces.
At the time, U.S. industry hailed it as a solid first step. They argued that China manipulated the yuan renminbi to subsidize exports, and that the yuan was 25-40 percent undervalued. Letting it float to market value would make Chinese goods more expensive and give a shot in the arm to suffering U.S. manufacturers.
So what's happened since then? Well, not much, frankly. The yuan has risen just 1.3 percent, much less than expected and much less than other currencies. The euro, for example, has appreciated 2.9 percent against the dollar, and Japan's yen has gone up 6.1 percent against the greenback.
I'd hardly call that a yuan revaluation, more like a minor adjustment. It makes you wonder what all the fuss was about last summer. And China's trade surplus with the U.S remains at unsustainable levels. So, should we assume Washington was duped and China's mandarins will do what they want?
China watchers like Dong Tao, chief economist for Asia at Credit Suisse in Hong Kong, believe that's too simple. In a July 20 speech before Hong Kong's General Chamber of Commerce marking the anniversary, he said the currency has moved very little because China's chief goal so far has been to ``bore the speculators to death.''
It's worked, he said. The country's trying to avoid a flood of destabilizing speculators betting on a sharp revaluation.
There are internal pressures working against rapid revaluation, like China's leaders seeing job creation and economic growth as a key goal, he said. Beijing admits protests are rising in the countryside and talks a lot now about spreading wealth more evenly.
Whatever happens, Tao said, decisions will be driven by Beijing's needs, not in response to pressure from other countries.
On the other hand, China's leaders are starting to see that a currency revaluation is in their best long-term interests, Tao said.
China's economy continues to steam ahead at levels that don't seem sustainable. The country grew more than 11 percent in the second quarter, its fastest rate in a decade, back when its economy was just a quarter of the size.
Facing an economy awash in bad loans and overinvestment, China's leaders feel pressure to slow that down to something manageable, and revaluing the currency will be a tool. As well, revaluation is only natural, given that China's economy and productivity growth are the highest in the world, he said.
The yuan renminbi will start to appreciate, and much faster than it has, he believes. But it won't happen any time soon. Think in terms of the middle of next decade, possibly sooner, he predicts, and China's yuan will be about 40 percent stronger.
But who knows, by that time, maybe we'll all be wondering what the fuss was about. The U.S. may find itself looking back fondly at the days when China made only the cheap stuff, and the world will be trying to figure out how to handle the flood of Chinese cars.
Steve Toloken is a Hong Kong correspondent for Plastics News.