China announced that it would allow more flexibility in the exchange rate of the Yuan. It’s as he Chinese finally awoke from a long slumber to realize that they are a first world nation with financial power. The decision comes after intense pressure by the US and other members of the G-20 who have complained that pegging the Yuan to the dollar unfairly favored Chinese exporters.
This move is really about time as the +15% rise in the value of the dollar this year has put significant pricing pressure on Chinese exporters, especially in hard hit European markets. This development favors US exporters and hurts Chinese exporters as the price of Chinese goods will increase for US buyers, and US goods will become less expensive for Chinese buyers.
One concern is that US debt will be less attractive to Chinese investors as this is certainly a first step towards a fully floating exchange rate. However, even with dollar holdings now ‘perceivably” less attractive to Chinese investors there is no way that the Chinese would immediately curtail their purchases of US Treasuries. Although a more flexible Yuan will make other currencies for Chinese investors, especially the euro, more attractive.
Regards – Keith Springer