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China gets a big bang for a tiny change in its yuan-dollar peg

posted on June 21, 2010 at 9:59 am
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Score it “Stability” 4, “Flexibility” 3.

That’s the count for how many times China used each word in announcing that it would end the peg that kept the price of its currency fixed to the price of the U.S. dollar.

China made it very clear, I think, that an end to the absolute peg means a move to a managed peg that will keep the yuan’s appreciation against the dollar to something in the range of the 3% that financial markets anticipated for 2010.

So why the huge rally in Asian—and other stocks–this morning?

Relief that the global economy has dodged a trade war at a time when the recovery is looking especially vulnerable.

In the run up to next week’s G20 economic conference in Toronto, China and the U.S. Congress looked like they might be headed to a collision with U.S. politicos such as New York Senator Charles Schumer (Dem.) threatening trade sanctions in retaliation for what he called “unfair trading practices.” The Obama administration seemed, if not exactly on board, to be increasingly willing to use the threat of Congressional action to pressure the Chinese, but there was no certainty that China would change any of its policies.

By moving now in advance of the G20 meeting China has avoided a collision that financial markets feared would turn into a nasty tit-for-tat trade war. Hence today’s rally.

Two points worth making at this juncture:

First, China’s language indicates a very limited and very slow appreciation of the yuan against the dollar. I don’t think the change will have a noticeable positive effect on U.S. companies selling into China. The currency exchange rate is only one—and perhaps the easiest to address—barrier to U.S. exports to China. Other barriers such as government buying preferences, local content laws, and controls on foreign investment in Chinese companies are much bigger barriers—and they all remain. The biggest winners on this, and this is reflected in today’s rally—are those Asia exporting countries that compete with China and that were getting savaged by the appreciation of their currencies against a yuan pegged to the U.S. dollar.

Second, by making this change before the G20 meets, China has taken the yuan exchange rate, if not off the agenda, at least off the top of the agenda. China would like to focus the meeting on the need for developed countries to reduce their budget deficits. And with the yuan no longer pegged to the dollar China is likely to get its wish on that.

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  • grindy2424 on 21 June 2010


    Seeing some huge pops in commodities because of this.

    My personally think this is great news for Brazil as well. Huge trade partners, I would think EWZ to get a bit of a pop. FCX also loves China.

    I’d also expect to see a rush into stock that do mostly domestic business in China. Jim wrote about this awhile ago.

  • grindy2424 on 21 June 2010

    One other idea…..

    Short treasuries – China will be able to stop buying so much to keep stable. They may move into another instrument here…. Looking for ideas.

  • Seaturtlelady on 21 June 2010


    What do you think about PBR??

  • sigli on 21 June 2010

    They can buy 3% more from POT now!

  • endorfb on 21 June 2010


    Not bad but I am a Coors kind of person!!

  • georic on 21 June 2010

    In my opinion, the Chinese have committed themselves to absolutely nothing. The yuan will now vary in relation to the dollar, according to what they deem best for them.

  • cjxland on 21 June 2010


    Coors? Alors…non, zut alors!!

    What would the founding fathers have said to that? [Probably "Crack me one of those Sam's, would ya?"]

  • Run26.2 on 22 June 2010


    As an owner of PBR (and one that has made good profit off them) I think they are worth a look, although maybe not now. I’ve not been able to follow as close as I should lately, but I believe they have a new stock offering coming out or something to help finance their deepwater exploration off the Brazilian coast.

    Long term, I like them, but I would do some DD on them. Also, the Brazilian govt seems to want them to succeed but also get their “share” off the oil from the new Tupi field and other new discoveries. At the moment, they seem to have struck a balance, but is worth keeping an eye on.

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