After strong pressure from its trading partners, China has revalued the yuan and removed the currency’s decade-long peg to the U.S dollar.
According to the Chinese government, the value of the yuan, also called the renminbi, will now be linked to a basket of currencies of China’s main trading partners, though the government did not reveal which currencies.
Specifically, the yuan had been pegged at about 8.28 to the dollar since 1994. The new exchange rate will initially be set at 8.11 yuan per dollar. The yuan will now trade within a 0.3% band against that basket of foreign currencies.
The U.S. has long pressured China to depeg its currency since it feels the yuan has been kept artificially undervalued, providing Chinese exporters with an unfair advantage. In fact, the U.S. had threatened to impose heavy tariffs on Chinese imports if the Chinese government didn’t adjust its currency.
Given China’s huge importance to the global economy, today’s news invites much speculation and discussion on potential impact.
Romeo Dator, co-manager of the U.S. Global China Region Opportunities Fund (USCOX) doesn’t see much of an immediate impact. “For the moment, the yuan is not really that much more flexible than it was prior to the depegging,” he said. “The immediate impact is an appreciation of the yuan of about 2.1%, but the trading band is so rigid, that, in reality, the yuan is still pegged to the U.S. dollar.”
A stronger yuan will obviously benefit U.S. companies exporting to China, but Dator thinks the revaluation will likely not hurt Chinese exports either because of the labor cost advantage in China. Indeed, Dator said that for those Chinese companies that import raw materials denominated in dollars, “they will be helped as the cost of those raw materials will be lower, thus helping their profit margins.”
Frederick Jiang, manager of the Ivy Pacific Opportunities Fund/A (IPOAX), believes the long-term impact of the yuan’s revaluation will be “very, very positive” for both China, other Asian nations, as well as U.S. investors. “Asian stocks have been undervalued because their currencies have been undervalued,” he said. “Now, as the currency strengthens, the value underlying these assets will ‘show up,’ and that will benefit U.S. investors.”
Jiang said, however, that the key question is whether this revaluation is a “one-off event,” or if it is a harbinger for further revaluations. “If it is an isolated event, a lot of the ‘hot money’ into Asia will likely flow out,” he says.