Increased Yuan Trading Band

By: Ian Campbell | Mon, Apr 16, 2012
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Without continued China economic growth at high levels, developed country economic growth and recovery is less likely. Currency exchange rates play a part in this.

On Saturday, April 14 China announced that it was doubling the 'trading band' on the Yuan/U.S.$ exchange rate by 0.5% to 1.0%. This was greeted by general enthusiasm, with reactions that included:

The first of the referenced articles also reported that last month China gave permission to firms across China to pay for imports and exports in Yuan.

You can find these views, and more, in the first three of the five articles referenced at the end of this commentary.

Finally, in what seems to be nothing but a 'pat on China's back' statement on Saturday, Christine Lagarde, Managing Director of the International Monetary Fund, weighed in on China's policy change, saying:

"I would like to welcome this important step by the People's Bank of China to increase the flexibility of their currency. This underlines China's commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate."

China has a strong interest in the face of developed country economic difficulties in doing what it can to keep consumers spending in the developed countries. China's currency announcement in large part has to be about ensuring, to the extent such a thing is possible, that the U.S. (and other developed country) consumers continue to spend on products manufactured in China. Consider in this regard (see referenced articles and the European Central Bank website) that:

Neither China nor any other country does things altruistically. China is, to some degree, today in the 'catbird seat' in world economic terms. Arguably, this Chinese currency policy change will tend to contribute to:

In other the words, this currency change in part can be seen as a China contribution to adding some glue to the can that keeps getting 'kicked down the road'.

Two other comments:

First, for China to allow its manufacturers to trade with their customers in Yuan is a material change from the currency control methodology that enabled the Chinese government to accumulated its vast horde of U.S. and other foreign currencies. This is an indicator that China is maturing as an economy, and may negatively impact the market for U.S. Treasuries. This is something to watch for; and,

Second, beware of growth statistics driven by percentages. Real (inflation excluded) growth is essential to the economic stability of any country whose population is growing. To the extent China's economic growth currently is an important engine that promotes growth in the developed countries, focus on the fact that perpetual growth at any given percentage rate is impossible - the 'magic' of compounding works in reverse. Stated differently:

 


China gives currency more freedom with new reform
Source: Reuters, Koh Gui Qing, April 14, 2012
Reading time: 4 minutes, thinking time longer

China moves on currency after growing US pressure
Source: The Telegraph, April 14, 2012
Reading time: 2 minutes

Analysis: China currency move nails hard landing risk coffin
Source: Reuters, Nick Edwards, April 15, 2012
Reading time: 4 minutes

China's Domestic Consumption Ambitions
Source: Profit Confidential Blog, George Leong, April 13, 2012
Reading time: 3 minutes

Statement by IMF Managing Director Christine Lagarde on the People's Bank of China Exchange Rate Action
Source: International Monetary Fund, April 14, 2102
Reading time: 1 minute.

 


 

Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Business Transition Simplified

Through his www.BusinessTransitionSimplified.com website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world economic and financial markets influences on those two topics. A recognized business valuation and transition authority, he founded Toronto based Campbell Valuation Partners Limited (1976). He currently is working to bring his business valuation and transition experience to both business owners and their advisors in our new economic, business and financial markets normal.

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