So China finally allowed their currency to appreciate versus the dollar. They didn't let it float freely, or it would have levitated away like a birthday balloon overfilled with helium!! But any move in the right direction bodes well for the currently imbalanced status of world trade. By imbalanced I mean that US and European consumers buy alot more goods from China than China buys from us. If you haven't noticed the 'Made In China' labels on everything in your household then you probably have your head in the sand in the direction of...well, China.
You're probably wondering what a stronger Yuan means to you, the average consumer. Well, when a company like Wal-Mart buys goods from China they pay for them not in dollars but in Yuan. In order to do so they have to exchange dollars for Yuan. Let's say that I can exchange one dollar for 7 Yuans. If an item costs 7 Yuans then it costs me 1 dollar. If the Yuan strengthens however, I might need to exchange $1.25 for each Yuan because now the Yuan is more expensive (i.e. stronger relative to the dollar). Now if I want to buy the same item that still costs 7 Yuans (notice the price in Yuans hasn't changed), it will cost me $1.25 because that's how much I have to pay for 7 Yuans. Going back to the Wal-Mart example, with the new exchange rate Wal-Mart and other importers of Chinese goods have to pay slightly more for the same items. They can leave their retail prices the same, absorb the extra costs, and reduce their profits. Or, they can increase the price that consumers pay to make up the difference in cost. While some retailers will choose the former, quite a few others will be forced to raise prices.
But it's not all bad news. For companies based in the US that export to China, a strongerYuan/weaker dollar makes their products more affordable to Chinese buyers and the expectation is that sales to China would increase. After all, if something goes on sale, wouldn't you buy more of it? Alcoa, for example, a large producer of aluminum, is seen to be a beneficiary of a stronger Yuan. They export aluminum to Chinese manufacturers in the automotive, aircraft, building and construction, and other industries. With a stronger Yuan, that aluminum is cheaper for Chinese customers but the price in dollar terms doesn't necessarily have to change. It could potentially be a huge win for Alcoa and the market thought so too, driving up Alcoa's share price after the Yuan announcement. There are other beneficiaries too. Just look for companies that export to those countries whose currency is linked to the Chinese Yuan.
Generally speaking the currency move is seen as positive for the global economy. After all, we have been buying cheap goods from China for many years and borrowing money from China by issuing more and more debt at increasingly lower rates. And although lower rates are good, we don’t have to look any further than the US housing market to confirm that too much or too low of a good thing could come back to bite us.
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