Revalue the Yuan? Good or Bad?

After years of pressure from the U.S. government, China finally revalued its currency. Although Yuan only rises for 2%, creating a limited economic impact, this move can definitely ease the tension with the U.S., while these two countries are still having problems in the areas of intellectual property and textile production.

This news surprises me a lot. I am not surprised by the move but surprise that it happens so suddenly. But according to analysts at Citigroup, the Chinese government has always said that they would do this when no one was expecting it.

I believe Americans will love this “first baby step” because they always think that the Chinese undervalued currency makes Chinese goods look cheaper. Right now, even though the changed rate is not large, people are pleased that the Chinese government is finally willing to “change”. As a Chinese, I really think this is a huge step for this conservative country.

But how would this affect the world economy?

Good side

It makes the U.S. goods look better because they are cheaper now. Thus the U.S. manufacturers will be happy about this, as they always believe China is doing business unfairly. It will also stop the relationship between China and the US growing worse after the issue of import quotas on textile shipments this year.

Bad side

According to Andy Xie, the head of the Asia/Pacific economics team in Morgan Stanley, China’s export sector will suffer because of this move. Since most factories in China are working for other global companies, which have their own brands and distribution channels, the export sector has a very low profit margin. After China’s currency to become a strong currency, the profit of this industry will decrease.

Market Reaction

For Hong Kong citizen, this news didn’t cause a sensation. However, people feel more optimistic about Chinese companies now causing their stock prices raise.

Conclusion

At this moment, we still don’t know the effect of the appreciation of Yuan. It depends on how the market reacts and how the china government responses. Most experts don’t believe any big movement would happen within a short period under the control of the Chinese government. But, anyway, this move will be a very important step for China itself and a very good political gift before the China’s President visits the US in September.

References:

• China: Increasing Currency Flexibility (Andy Xie, Morgan Stanley)
• China revalues yuan, pleases Washington (Reuters)
• Move Strengthens White House Hand; Congress Vows Pressure (WSJ.com)
• FAQ: China’s Yuan Revaluation (WSJ.com)

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