Obama’s letter just may have had something to do with China’s surprising announcement that they will make the yuan’s exchange rate more flexible. Does it mean that they will un-peg the yuan from the dollar? It probably does. And while Obama and many other western leaders have been pushing for this kind of a move for a long time, it remains to be seen whether this will have the desired effect of making the U.S. more competitive in the goods markets where China has long been able to undercut them on value through sales.

Will the revalue the currency or make a major appreciation? That seems unlikely. But it does mean that China will not be resistant to all gestures from the upcoming G20 summit, and U.S. Treasury Secretary Timothy Geithner called for "vigorous implementation" of the change. The move was praised as positive by economists:

"We believe this is a positive gesture, suggesting the yuan will soon resume its appreciation against the dollar," said Yu Song and Helen Qiao, Goldman Sachs economists.

It’s a strategic victory for the U.S. that allows China to save its value- while Obama put on the pressure, China made this call themselves, and it is not exactly what Obama was asking for. So while it is a positive thing for the world’s economic stability and will keep China from moving even further out ahead, it will not negate their economic advantage.

"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability. "It is desirable to proceed further with reform of RMB exchange rate regime and increase the RMB exchange rate flexibility." said the Chinese central bank on its website.

According to a spokesperson for the IMF, this will raise China’s household income and their domestic investment, both of which are positive moves for the balancing of the world’s economy.

The idea is that they will make slight adjustments in the yuan’s exchange rate, hopefully creating a few percentage points of accumulation in the next few months. We are out of what is being called “crisis mode,” and it is sure to be a major move that will shift the ability of everyone to recover. If Obama can get Europe to shift their own crisis mode focus on their budget deficits to keep spending rather than over-react to problems and cut spending far enough o swing the world’s economics into another downturn.

"If the euro falls sharply against the dollar, the yuan may depreciate against the dollar as it refers to a basket of currencies. But if the euro stabilizes, the yuan could rise against the dollar. The message to the outside world is: don't pressure us," said Li Daokui, academic advisor to the monetary policy committee of the People’s Bank of China (their central bank).

So what we’re seeing is that China is well aware of how the world’s economic engine needs their currency to act, but that they are smart enough and strategic enough to make sure that they are not bowing to pressure from the outside or shooting themselves in the foot. The U.S., while still influential, is seeing the rise of another currency as, if not stronger than the dollar, at least a rival in the financial markets of the world. Will the dollar one day be pegged to the yuan?

Photo Credit: Wesley Fryer