An Expert’s View on Yuan Appreciation

Frank Holmes - U.S. Global Investors | June 22, 2010 | 7:34 am

Global markets got a nice lift on news that China will allow gradual appreciation of its currency against the U.S. dollar. But those who closely watch the issue are emphasizing the word “gradual,” as in “don’t expect too much action too soon.”

CLSA Asia-Pacific Markets, the influential Hong Kong-based brokerage, added its analysis to the broader discussion in a conference call. Here are a few of the key points, both short-term and long-term:

  • While actual appreciation will be slow, Washington will be happy with this move because it breaks the yuan-dollar valuation peg in place since July 2008.Chinese Yuan 062210
  • A more expensive yuan may raise the price of Chinese products overseas, but this impact will likely be offset by the fact that China will still be the low-cost producer for a wide range of products popular in Europe and the U.S.
  • One of the most significant impacts may be that this move provides a long-sought entry point for overseas investors to return to China. Asset prices should benefit, particularly share prices. Capital flows into real estate will be watched closely – if property attracts too much money, Beijing will respond decisively to cool things down.
  • Emerging markets overall stand to benefit from higher capital flows as global risk appetite increases.
  • Over the long haul, China will be become a more inward-looking economy, with more focus on domestic development rather than the export sector. Given China’s scale, “this has the potential to be game-changing,” says Eric Fishwick, CLSA’s top economist.

We have long been bullish on the China domestic growth story, which has increasingly been driven by the rapid rise of the country’s middle class and Beijing’s recognition that expanding and improving the nation’s infrastructure is vital to internal prosperity and global competitiveness. Appreciation of the yuan stands to impact both by boosting the purchasing power of Chinese families and reducing the cost of copper and other dollar-denominated commodities needed for public projects.