China has revalued its Yuan peg to the US dollar and will . This could mean that they won't be buying as much USD's so support for it could evaporate. In my opinion, this could cause inflation in the US and I don't think that it will cause a decrease in the deficit. This could cause the Aussie to go up, along with our markets.
Thursday, July 21, 2005
CHINA UNPEGS YUAN!
China has announced that Yuan will float against a basket of currencies, and world markets are leaping on the news.
``This should help all exporters in the developed world by making the Chinese economy less efficient,'' said Sergi Martin, who oversees $5.3 billion at Credit Andorra in Andorra. ``It helps the U.S. economy by narrowing the big deficit that country has with China. It is good for the U.S. market, and by extension, for Europe.''
More reports here, and here, and here.
The new yuan rate versus the dollar revalues the currency by 2.1 percent, to 8.11 per U.S. dollar as of 1100 GMT, the central bank said on its Web site . Under the previous policy, the yuan was kept near 8.28 per dollar, a virtual peg that had led the United States and other countries to complain that China's currency was unfairly undervalued.
The change was made to "With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand" the bank said."RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility."
This is a small step onto a very long path. At the end of it, China will be a fully integrated market economy, and the yuan will be freely floating.
But that may be decades away, and in the meantime, China's low labour costs will maintain its hyper-competiveness in export markets.
And maybe it's good that it is only a tiny first step. The Globalist argues that the yuan has been held artificially low by massive china purchases of US bonds, to support the value of the $US. If the yuan is a genuinely floating currency, the support would disappear, with chaotic consequences.