Monday, China floated the Yuan, ending the two year fixed peg to the US Dollar. In response, international markets surged as expected, a rally led by the Shanghai Exchange. Notably, it saved my ass on this site since I have steadfastly maintained China would float by summer.
Gimme some mojo and meet me after the flip.
** Updated at bottom of main diary **
Whoa, Daddy!
Late Monday, China Central Time, the Yuan was trading 6.8012 to the U.S. Dollar on spot markets up from 6.8272 Friday.
Some indices, as of this writing :
International Markets
Shanghai Stock Exchange Composite Index, 2.9%
Hang Seng Index (Hong Kong), 3.1%
Nikkei (Tokyo), 2.4%
FTSE 100 (London), 0.9%
DAX (Frankfurt), 1.2%
CAC-40 (Paris), 1.4%
USA Markets (mid-day)
Dow Jones Industrials, 1.1%
Standard & Poor's 500, 1.0%
Nasdaq Composite, 1.1%
The Russell 2000 Index (small companies), 1.4%
The losers, if you will, were bonds with with 2-Year US Treasury Note yield up climbing 3 basis points to 0.74 percent. I'll go out on a limb here predicting the Liberal Conscience of Paul Krugman was not overcome with severe and acute guilt pangs for foreign investors in T-Bills and is in no need of medical treatment.
Depending on one's position, there might be some losers in commodities. The killers:
Crude oil rose $1.45 to $78.63 per barrel on the New York Merc
Gold peaked at $1,266.50 an ounce (a record), closing at $1,257.00
How Does it Work, koNko?
Cutting the Dollar Peg (at nominally 6.83 to $1) the Yuan will trade against a basket of currencies within a daily trading band of 0.5% to limit volatility and speculation, which would be a serious threat to the global monetary system.
While 0.5% might seem like peanuts to the whiners of the China Mercantilist Conspiracy Set, humans with spreadsheets can compound the potential gains to plot an upside trajectory as no doubt Yuan traders already did when they checked their Forex Widgets/Gadgets/Whatever this morning.
We shall see how far this goes in the next few months, but I'm comfortable predicting the rates will climb in steps and seesaw as the actual effects of Yuan appreciation set into global markets; no free lunch, folks, Chinese exports will become more expensive and that is going to have some real effects on the global recovery in the short-term. I believe the wisdom of the trading band will become apparent before too long.
The Fun Part
This is good news for US manufacturers as an appreciating Yuan will make US exports more attractive on global and Chinese markets, and it comes at a time when US exports to China are increasing and Chinese buying power will increase. How much of an effect remains to be seen, but it comes at a time when a low Euro has put American exports at a disadvantage to Europeans and it should restore some balance.
The good news for China is this should help to tame inflation at a time when the Government is nearly at wits end to do so, and should spike domestic consumer spending.
But the biggest winners, I think, will be Japanese; China is now Japan's largest export market (China runs a steep trade deficit there) and this should provide Japanese a badly needed boost at a time they have been priced (and harangued) out of other market due to the strength of the Yen and, um, Canadian parts manufacturers.
Losers? Whomever bought US Dollars with Yuan. Chinese exporters, who will face increasing cost pressure, getting another smack upside the head after the 20% wage increase. Folks who eat gold bars and wash them down with crude oil.
I Smite Thee G20
Sometimes, timing is everything and in this case, Çhina's impeccable timing was not lost on analysts who have duly noted this announcement came just days ahead of the next G20 meeting. Yuan hawks are grinding their teeth. Tim Geithner, however, might be breathing a sigh of relief spared another stare down - or not (he seems to enjoy lecturing Finance Ministers on Exchange Rates out one side while demanding Treasury Supports out the other).
Sez Tim:
"We welcome China's decision to increase the flexibility of its exchange rate," Geithner said in a statement released by the Treasury Department.
"Vigorous implementation would make a positive contribution to strong and balanced global growth. We look forward to continuing our work with China in the G20 and bilaterally to strengthen the recovery."
Sez Tim's Boss:
"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement.
"I look forward to discussing these and other issues at the G20 Summit in Toronto next weekend."
I bet he does. My mojo for a fly-on-the-wall-suit.
Sez Xinhua:
"If they cannot make good use of the coming G20 summit to press ahead with the much-needed overhaul of the global financial system, the international community will soon find to its disappointment that its leaders look only for red herrings, rather than real solutions, at a time when true leadership is badly needed."
You tell ém.
Gesh, it’s after midnight. Gotta-go.
** Update **
An opposing viewpoint can be found in ManufactureThis's diary China's Currency Charade
I encourage you to read and comment in both.
Good Night.