China’s currency rose steeply against the dollar this week, feeding speculation that Chinese authorities, yielding to international pressure and economic realities at home, were allowing their currency to appreciate more rapidly.
The currency, known as the yuan or renminbi, rose 0.9 percent this week — faster than over any week since China stopped pegging it to the dollar on July 21, 2005. Thursday, the yuan rose 0.37 percent, the largest one-day increase since the peg ended. On Friday, it rose 0.18 percent, to close at 7.3041 to the dollar in Shanghai trading. That may be a sign that China is moving away from its policy of intervening in foreign exchange markets to keep its currency undervalued.
That would be good news for US exporters - a stronger yuan means that China can buy more US goods. Of course, there are some down-sides for the US: (i) prices of all the goods we import from China will rise - though the process of "exchange rate pass through" tends to be slow - which will hurt consumers, and possibly add a bit to the Fed's inflation concerns and (ii) as the trade gap narrows, China will be purchasing fewer American assets, which will be bad for asset prices - in particular, the price of bonds (i.e. interest rates may rise as the "capital inflow" from China diminishes).
On balance, its a good thing - a situation where a relatively poor country was lending billions to a rich country seemed perverse and precarious (and presumably unsustainable, though there's been some debate about that). Allowing the yuan to appreciate more is a good step towards an unwinding of these imbalances. In the US, increased employment in exporting sectors may help make up for some of the ill-effects associated with the real estate market decline.
This will also help China raise its own living standards and contain inflation. Moreover, other developing countries that compete with China (e.g. Mexico) will also benefit.