COMMENTARY | On Saturday, China’s Peoples Bank of China announced it would widen the trading platform of the yuan vs. the dollar to a daily limit of 1 percent up from the previous 0.5 percent. This change will begin when Chinese banks open for trading Monday morning. This is sure to please the U.S. government, which has repeatedly claimed China manipulates trade by keeping the yuan undervalued. But this move could have consequences for the American people who purchase Chinese goods.
Lu Zhengwei, chief economist at the Industrial Bank, has warned export led enterprises to guard against a rise in the value of the currency and to prepare for short-term fluctuations.
“Enterprises have to spend certain costs in making arrangements to guard against risks. Only after they get adapted, could [the yuan’s] price reflect true market conditions,” Lu said in China’s Xinhua News.
This could indicate a sudden rise in the cost of Chinese imports to America. This rise would affect consumers reliant on cheap Chinese products for their daily lives. In addition, manufacturers based in China could see a rise in their production cost, which undoubtedly would make its way to the consumer.
One reason China feels comfortable widening the trading platform is the belief that the yuan has reached an equilibrium point and the fluctuations would not be very significant. In March, Premier Wen Jiabao cited this equilibrium status when speaking after the close of the fifth meeting of the 11th People’s Congress, by acknowledging the Yuan has fluctuated in both directions since September in Hong Kong markets.
China also expects this move to speed up the exchange rate reform and more rapidly reach a balanced level thereby stabilizing trading markets.
Ding Zhijie, dean of the School of Banking and Finance with the University of International Business and Economics told China’s Xinhua News, “A more flexible Yuan will help better identify market supply and demand and promote [the yuan’s] price to reach a balanced level, which will facilitate the exchange rate’s reform.”
While this move should receive a warm welcome from the United States, it seems mostly a symbolic move and that the long-term effects would be minimal in both the United States and China. There may be an initial rise in trading the first week due to the excitement of this announcement but that should rapidly calm and return to normal levels.
One beneficiary of this could be companies that export goods to China, as the prices they receive would remain steady and the converting that money back into dollars would give them a greater profit.
For more information view: http://news.xinhuanet.com/english/china/2012-04/15/c_131528219.htm
http://www.reuters.com/article/2012/04/14/markets-china-debt-idUSL3E8EM4E320120414
http://finance.yahoo.com/news/china-gives-currency-more-freedom-040129804.html
