China ends peg to US dollar
The Globe and Mail has a quite interesting infographic that illustrates some potential effects of China’s big move yesterday to end the Yuan’s peg to the US dollar. This is building up to the G20 summit this weekend in Toronto. China has been under international pressure for some time to remove the float: its artificially undervalued currency was terrible for western trade imbalances. However, the Globe and Mail cites a report from Scotia Bank Capital claiming that the move has nothing to do with international pressure, but rather, the need to contain inflation. The inflation argument makes sense, but certainly China wants to get its kudos in time for the upcoming summit.
The move should spur domestic spending in China, as well as easing the burden of currencies like the Australian and Canadian dollars, which have been appreciating rapidly while the US economy has struggled. It’s good for companies that do significant amounts of consumer business in China, such as car and heavy equipment manufacturers, as well as consumer goods and electronics. Interestingly, emerging markets should benefit from this as Chinese labour becomes more costly.
Under the rubric of negative effects, this piece suggests broadly that this move may well provoke speculation and volatility, but offers no more specifics than that. There is the risk that the currency could move lower than the dollar, thus worsening what western governments are already unhappy with. And if the move increases Chinese purchasing power, that will probably result in higher commodity prices – in particular oil – since Chinese consumers will ostensibly increase their consumption of these goods.
The pundits are all pretty much in agreement that this readjustment of the currency – in spite of being long sought after – is not any sort of magic bullet or quick fix to the trade imbalances. The article cites an economist who says that countries like China and Germany, who are savers, need to spend more, and that countries that spend a lot need to calm down their expenditures. The move is a symbolic win for the US and helpful at the margins, but that the real work will still have to be done and time will tell how this plays out for countries in general and, on a more micro level, the mortgage market and Canadian families.
