The U.S. markets took their higher opening cue from the Asian markets on Monday morning following the Fathers Day weekend announcement by China that it will allow its currency to loosen the de-facto peg against the U.S. dollar. So it appeared that the global markets were quite receptive to the news and I saw a number of articles that seemed to suggest this was a precursor to stabilizing economic growth for those same global markets. Somehow I just don’t quite buy into that yet!
First off this will never be a significant one time adjustment in valuation. Instead, as a follow up to the weekend announcement, the People’s Bank of China indicated that any strengthening in its currency would be done gradually. For nearly two years now, the Yuan has been pegged at a rate of 6.83 versus the U.S. dollar and despite the recent news, the China central bank maintained that parity rate to begin the new week. So once again, don’t expect any change to happen fast.
More likely, at this time, the announcement will probably serve to diffuse what could have been perceived as building tension among participants at the upcoming G-20 meeting to address the Yuan valuation issue. China has been essentially accused of keeping its currency artificially low to support its exports. Now while representatives such as U.S. Treasury Secretary Geithner may still want to press for the speed of revaluation, the Chinese will be better able to defer that conversation having at least “thrown a bone” on the floor, so to speak.
I have no doubt that the Chinese government will do what’s best for China and how that effects the global economy is of secondary matter. To their credit, it does appear that China has been managing rather effectively the soft landing of its economy in the midst of the global economic crisis. With what might be construed, on the part of the Chinese, as increased confidence that there can be sustained improvement in the world economy, a strengthening of the Yuan will prove quite beneficial to the residents of the country as it can make imports cheaper.
Here in the United States the administration has clearly been trying to bully, as it would like to think, the Chinese into a revaluation mode. Now that it appears some concession is on the table it should prove interesting. Certainly for our domestic companies that export to China it should prove beneficial increasing business. However, stop and think about all the imports that we make from China beginning with all the many retail products that could now cost us more money. It will be interesting to see whether the rate change that takes place proves to be more positive than negative for us here in the states!
