What China’s Yuan Move Means


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On Saturday, China’s central bank said it would give more flexibility to the yuan (renminbi), which has been pegged to the US dollar since the 2008 financial crisis. Here’s a summary of media commentary on what the yuan move means:

It will placate US politicians. “Washington wants Beijing to abandon a currency peg against the dollar that U.S. lawmakers say gives Chinese exports an unfair advantage in world trade and steals American jobs.

“China’s announcement appeared timed to deflect criticism at an this weekend’s Group of 20 summit in Canada and placate an increasingly insistent Obama administration and hostile U.S. Congress.” (Reuters)

Cheaper Western goods for Chinese consumers. “With the yuan set to become more flexible against the dollar, Chinese consumers will be able to purchase Western-produced goods at more competitive price, from Nike sneakers to Apple iPods.” (Forbes)

Lower inflation risk for China. “The stronger yuan also should reduce the threat of inflation in China, meaning the government won’t likely have to raise interest rates soon. Investors in recent months have been somewhat concerned that China would take steps to restrain rapid growth in the country.” (NPR)

Big foreign retailers will see increased production costs. “Big retailers that source from Asia, such as Hennes & Mauritz and Target and Wal-Mart Stores Inc, would see a firmer yuan push up their production costs.” (Reuters)

Automakers and heavy machinery makers will benefit. “Foreign automakers which sell cars in the world’s largest vehicle market, such as BMW, Volkswagen and General Motors…should also gain.”

The world’s largest maker of earth-moving equipment, Caterpillar Inc, could be a major winner. Second-ranked Komatsu said that every 1 percent rise in the yuan would boost its operating profit by 1.1 billion yen ($12.1 million).” (Reuters)

Chinese raw materials and fuel importers will benefit.
“…index heavyweights such as airlines and metals firms, which would likely benefit from lower yuan-denominated prices for imports of raw materials like fuel and iron ore. Yields on Chinese government bonds and local interest-rate swaps also fell on expectations that a stronger yuan will reduce the need for an imminent interest rate hike.” (Wall St. Journal)

US Treasuries will go bearish. “…one certain mid- to long-term impact of China’s revaluation decision, aside from stimulating the US manufacturing export economy (don’t laugh), will be to trim Chinese interest for bonds. This is due to a direct effect of fewer Chinese dollars being recycled into USTs now that less USD reserves will be accumulated, but also due to an indirect effect of stimulating demand for risky assets, pushing USTs off the plate of investors.” (Zero Hedge)