Yuan flexibility: winners & losers

In Economy on 22/06/2010 at 7:29 am

S’pore is a big winner because the world trade is the biggest beneficiary of greater yuan flexibility (better word than “revaluation”).

One loser — Overseas consumers of Chinese will likely pay higher prices.

Not certain if commodity producers will be winners or losers.



Analysts at Credit Suisse reckon the renminbi is 50 per cent undervalued, while Chinese inflation recently hit a 19-month high. So, even if external pressure wanes as a result of its latest baby steps, the rationale for a bigger move is building.

With about 70 per cent of China’s foreign exchange reserves in dollars, mostly in Treasuries, maintaining the peg has helped keep the cost of US borrowing low in the face of record issuance. A quicker revaluation would act as a stealth monetary tightening not only in China but also the US. And, although isolated export industries in the US might benefit, the net effect on US equities would be negative if borrowing costs rise materially. Even commodities might suffer as lower Chinese fixed investment and damped US growth outweigh Chinese consumers’ enhanced buying power. Cheering markets should be careful what they wish for.

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