For most people, it came as a surprise when Beijing released its decision to unpeg the Yuan to the American dollar. China's currency and trade policies have long been picked as a red herring by politicians, instead of finding a real solution.
The move was hoped to achieve many positive affects such as; help China keep a cap on inflation, increase domestic purchasing power, ease tensions between the West, give other countries an advantage in trade and boost commodities demand. But after the news was released, enthusiasm caused by it was extinguished after only one trading session, and markets fell again.
This revaluation is not the cure all for the global economy; a fact which oftentimes seems overlooked, or ignored. As during the last time China allowed the Yuan to appreciate, it was not the solution to the trends that would cause the future global financial crises. Unpegging the Yuan is a symbolic victory for the US, and may aid in stabilizing the imbalance, but it does not tackle the root problem: the attitudes of these two countries.
The rise of the Yuan will most likely be counteracted by other, stronger economic forces; investors are still anxious regarding the European debt crisis and the fragile American economy. A fluctuating Yuan will not cure the problems at the core of the global economic imbalance; some countries (their businesses, consumers and governments) spend too much (e.g. US), while others spend too little (e.g China).
The US has a trade deficit with China of $226.8 billion US dollars (2009). This could act as a very basic representation of the two types of consumers in American and China; Americans spend their money on goods made in China, and then the Chinese save that money. The average personal savings rate of Americans is about 3.6%, whilst that of the Chinese is ten times as large, at 36%.
With the revaluation, Americans are now more competitive on the international market, and can start exporting to China. On the other hand, with more spending power, more Chinese will go out there and buy something new, flashy and American. Or at least this is what everyone wants to happen; in fact, even the Chinese government wants to boost domestic consumer spending (as they look to move towards a new growth model). Unfortunately, even with the increase in purchasing power of the average Chinese, many of them are not planning to spend their now higher value savings.
The broader problem is caused through domestic problems in both countries such as wage rates/income disparity, living standards, and how people save and spend their money. For example, many Americans lived beyond their means through overly relying on debt to finance their purchases, as did many financial institutions, which eventually played a part in causing the financial crisis, and now coupled with unemployment, they don't have much savings, and won't be getting more money. In China, the real estate market is unstable and wages can't seem to keep up the inflated prices; thus many Chinese save and save in the hopes of one day owning their own home. China's "social security net" also has very large holes in it, and many families save rigorously in response to the this weak net (e.g. lack of health care coverage, pensions). These are issues that will not simply be fixed on the markets.
China and the US acknowledges these problems, and appreciating the Yuan may help to ease some of them; however it should only be considered a step towards finding a true solution. Countries all have their unique and delicate (economic and social) situation, and so policymakers must be ever attentive regarding the situation if a true balance is to be reached.