My Two Cents

Last Thursday, it happened.

The Chinese Yuan is no longer pegged to the U.S. dollar.

The surprise currency move follows months of intense pressure from China’s trading partners to revalue the Yuan. Expectations are that higher prices for Chinese exports as a result of a fluctuating currency will make domestic goods and other exports more attractive in countries like the U.S.

Before the change, cheap Chinese exports made it almost impossible for anyone else to compete in the marketplace. The new policy is good news for any producer in any country that has tried to compete for some of China’s market share–and it’s good news for Chinese companies too.

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The former system meant cheap exports, but it also meant inflated prices for energy, oil, steel, ore, and other raw goods that the companies needed.

Some U.S. policy makers have said in the past that the pegged Yuan was undervalued by as much as a sharp 40%. Many believe that the next few months of trading will push the “new” Yuan up in the range of eight percent to 12%.

Under the terms of China’s new currency system, the Yuan can fluctuate against a basket of other currencies within a 0.3 percent range from the previous day’s closing price. In other words, if the Yuan closed at 8 today, tomorrow it could move to 7.7 or 8.3–no lower and no higher. That’s not a lot of room for movement in one day, but over time it could mean a rather significant change in the value of the Yuan.

Now, I’ve said it before, and I’ll say it again: If you think that the change in the Chinese currency system is going to save jobs and economy pressures in North America, you’re mistaken.

Remember what Alan Greenspan said on June 23?

“Some observers mistakenly believe that a marked increase in the exchange value of the Chinese [currency] relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion.”

I think he’s right on this one.

I believe China’s decision to restructure its currency system was a good move for the country, politically speaking. Economically speaking, however, I don’t think the revamped Yuan will have much of an impact on the global economy.

Just my two cents, or 16 fen (0.16 yuan), on today’s international market.