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Many believe that China is on the verge of a major currency appreciation, and much has been made of comments by Jim O’Neil, chief economist at Goldman Sachs:

O’Neil thinks the Chinese could allow the yuan to strengthen by as much as 5%. “I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set aside larger reserves. “Something’s brewing. It could happen anytime.”

Agreed that something is afoot, but I don’t believe it’s going to be a simple currency revaluation. Since I haven’t been wrong too often, maybe it’s time I went out on a limb. Here is what I expect: China will announce a major shift in economic policy, and that shift will have little (or nothing) to do with the currency exchange rate. China’s economic policy shift will please the U.S. a little, while satisfying its own people more. Any new economic policy introduced will have far less to do with an attempt to rebalance the global economy. It will have instead more to do with an effort to reduce wealth disparity in China.

Wish that I had the time here to go into a more detailed explanation, but suffice it to say that while the economic stimulus has led to fast GDP growth, too many of China’s laobaixing have been left out.  Many in the U.S. believe “China is in a bubble.” This may be the case, but it is not a sentiment shared by average Chinese. In South China, compared with a couple of years ago, the buzz has gone, and people are no longer as optimistic as they once were. There’s more grumbling about corruption. Macroeconomic numbers suggest rocketing growth, but on the ground there’s this odd feeling that the air has been let out of the tire.

The Chinese government has a sense of it I think, and official comments made just prior to Chinese New Year were probably meant to address this malaise. The big question is, what kind of economic policy will have the effect of lifting prospects for average Chinese? Currency appreciation is a too-blunt tool applied to a sophisticated problem. For a number of reasons, it was also the wrong time for the Obama administration to push for such a revaluation (and the way it was done, let’s not go there). America wants currency appreciation because it wants China to purchase more American goods. If that’s the case, the answer might actually lie in in getting more disposable income into the right Chinese hands.

Let’s see what China announces…

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