China Floats Yuan Against Dollar: Who Wins and Who Loses
The world cheered over the weekend when China's central bank announced it would allow its currency greater leeway to float against the dollar. By this morning, the yuan had moved from 6.82 to the dollar -- where it had been held for two years -- to 6.80 to the dollar, its highest level since the 1980s. The instant analysis was that this move away from a yuan/dollar peg would help everyone -- it would stabilize the Chinese economy, boost exports from Europe and the U.S., and generally make the world a better place.
Perhaps. It was a step in the right direction, but it was a small and guarded step. And even moves in the right direction can hurt some folks even as they help others. Here's a look at some winners and losers from China's currency move:
- U.S. consumers will pay more. If you're hooked on cheap (and not so cheap) Chinese-made clothes, toys, and Apple products, you can expect their prices to rise, gradually, as the Chinese yuan rises gradually against the dollar. That could also hurt U.S. retailers, especially the ones that depend on those low-priced Chinese imports.
- U.S. exporters will gain. With more Chinese workers starting to make money and being able to buy things, there will be demand for everything from Coke to cars, and those goods will be cheaper in China than they used to be. Companies that make machine tools and industrial equipment, such as Caterpillar, are already big sellers in China and should do better in a hurry now that their products will cost less priced in yuan.
- Foreign fund holders could see profits dip. Folks sitting in mutual funds that buy Chinese stocks have been doing extraordinarily well. But unless their fund hedges currency risk, they'll see net asset values drop a bit as it takes fewer dollars to cash out those yuan-denominated investments.
- Oil and gasoline prices could rise. Dollar-priced oil will get cheaper for Chinese buyers. Couple that with increased demand from the world economic recovery and there's more competition for petroleum. That could sting drivers in the U.S.
- World debt woes could ease a bit. Europe's exporters would also benefit from increased sales to China, and that would put more cash in the hands of countries trying to pay down sovereign debts. Oh, and that includes the U.S., too. China will now be able to continue buying huge amounts of U.S. Treasuries with fewer yuan than before. That will help keep U.S. interest rates low and buy Washington some time to deal with its own monster deficit.
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