But such an insignificant rate hike will do little to relieve long-term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan's exchange rate. Indeed, the logic is self-fulfilling: as more foreign currency flows into the market, the economy will continue to overheat, necessitating further interest rate hikes.
Meanwhile, the dollar's falling value reflects the fact that the Fed is pumping more money into the system than are most of its trading partners. So, the dollar will continue to weaken until the rate of increase in new money into the US economy no longer exceeds that of domestic economic growth, and instead corresponds to the pace of monetary expansion followed by central banks in the rest of the world.
China's effort to hold down the value of the yuan vis-a-vis the dollar is thus a costly and pointless policy. By delaying a decision to float the yuan, the Beijing is merely contributing to greater instability in the Chinese economy.
Christopher Lingle is professor of Economics at Universidad Francisco Marroque in Guatemala and global strategist for eConoLytics.com.
Copyright: Project Syndicate