Andy Mukherjee finds that the Bush administration has manage to increase exports to China in one area: policy incoherence. China has announced it will be seeking exchange rate flexibility AND convertability.

To be clear: convertability means that it will become legal and easy to exchange Yuan into dollars. Exchange rate flexibility in this case means that the Yuan/Dollar exchange rate will be allowed to fluctuate more, that it will be more determined by the market.

If China were just going to float the Yuan and let the market totally determine the exchange rate, then this would make sense. The major motive for adopting capital controls (i.e. abandoning convertability) is that you can have a fixed exchange rate and a monetary policy under the government's control.

This is because of one of the great "you can not have what you want" truths. You can not have free exchange of currencies, an independant monetary policy and a fixed exchange rate.

China, however does not want a total float. They want the currency to move up and down in a preselected band. If they make the Yuan convertable, this will be harder to do without fucking up monetary policy.

What about the Bush administration? Well, who knows why the Chinese government does what it does? I won't pretend that I know, in fact I use that question to answer an awful lot of questions about China, such as, "why is the square so shiny while the streets and sidewalks are full of rubble?"

Still even if we don't know why this decision was made we do know that this is what the U.S. Treasury wanted. Mukherjee lays it out thus:

If that looks like an attempt to link two moves that don't need to be bundled together, consider statements by those who're pushing China to change its currency regime. Even they have made confusing demands. Donald Evans, until recently the U.S. commerce secretary, said in June that for China to qualify as a market economy, the yuan ``needs to be convertible, not revalued.''

According to Evans, ``the lack of free flow of capital leads to an un-level playing field.''

That view seems to clash with what U.S. Treasury Secretary John Snow has been saying all along. Last month Snow said that the Bush administration is engaged in ``tough-minded diplomacy'' with the Chinese to ``achieve the desired result which is a flexible currency.''

Pressure was applied and the decision was made. The evidence is circumstancial but significant.