China's currency, the renminbi, closed Friday at its strongest level against the US dollar since China revamped its currency policies in 2005, The New York Times reported. This development comes just one day before global leaders are set to meet in Toronto for the latest G20 summit, where China's currency was expected to be the major topic of discussion. Many economists and U.S. politicians have claimed that China has kept the renminbi's value artificially low in order to encourage exports, says The Times.
Several weeks ago Wipro Chairman Azim Premji said in his Big Think interview that he thought "the Chinese government is realizing that the economy is overheating," and predicted they would take proactive steps to slow it down. By driving China's export sector, the undervalued currency has been a major contributor to the rapidly-expanding economy. Economist Paul Krugman predicted the same thing when he spoke with Big Think, but he said it would be in China's own interests to raise its currency. China has been running huge trade surpluses, which it has reinvested in U.S. currency. So right now they're sitting on vast quantities of dollars which earn very low interest. Krugman calls this a "bizarre use of their resources" for such a poor country.
Now that China has begun to loosen its grip on the renminbi, the growing debt crisis in Europe and financial regulation are expected to be the focus of the G20 summit, says The Times. But the fact that the renminbi threatened to be the major issue at the summit underscores China's waxing economic and political might. China weathered the recent economic recession without dropping below 6% growth, and it has already rebounded to a rate of nearly 12%. Especially at the depths of the recession, many proclaimed China a new global superpower. In a recent interview with Big Think, historian Niall Ferguson from Harvard went as far as to say that China no longer needs the U.S. He describes the relationship as "a marriage on the rocks, and [China is] actively looking, if not for another partner, then certainly for a divorce from this somewhat unreliable and spendthrift American spouse."
But David Dollar of the World Bank and others agree that China faces significant roadblocks in the future. Dollar believes that China's one-child policy will result in a labor shortage starting as soon as 2020. China must also address its growing environmental crisis, says Mark Leonard, Executive Director of the European Council on Foreign Relations: "The destruction of the Chinese environment has proceeded at an absolutely terrifying pace, so that a majority of Chinese people don't have access to clean water." Ferguson warns that many promising political experiments in the past have failed because they lacked political freedom and economic freedom, which he says are "indispensable for an innovative society."
So what are the chances for reform in China in the near future? There are two factions within the government, says Leonard: one side which wants to complete the economic reforms of the 1980s and the other which favors a "gentler form of capitalism" that doesn't rely completely on markets. Whether today's step towards greater currency flexibility heralds further reforms in the future remains to be seen.