Of all the major couplings that have gained prominence—Jairam Ramesh's "Chindia," Niall Ferguson's "Chimerica," and Martin Wolf's "Chermany"—it is very much the latter that is in the spotlight.
The announcement over the weekend by China to introduce greater exchange rate flexibility is unambiguously good news, provided, of course, that intent is followed up with some actual upward movement of the renminbi. Domestic economic imperatives, and specifically the role of currency appreciation in dampening overheating, have been widely credited as having influenced China's decision. But there is a mystery here. China's competitiveness was getting eroded by two sources: domestic wages and prices, which are rising faster than in partner countries, and by the decline of the euro, which—combined with China's peg to the dollar—was causing the renminbi to rise in trade-weighted terms. So why is China, so wedded to the mercantilist export growth model, changing its policies to further aggravate the decline in competitiveness, especially when the global recovery is still looking shaky?
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