Financial markets
Buttonwood’s notebook

China, currencies, markets and protectionism
Yuan for the money

Gauging reaction to China's announcement

THE big news of the weekend was China's change in currency policy (and you can read the intrepretation of our Asia economics editor here). The announcement was couched in fairly opaque language, allowing analysts to draw widely differing conclusions.

The markets have reacted positively, with the dollar down and risky assets up. But Gareth Berry of UBS points out that the change may be limited.

The news does not signal that China will allow a major revaluation of the renminbi. The maximum permitted daily range will remain +/- 0.5% and china's statement specificially mentions that no basis exists for a large-scale appreciation of the currency. So while China will allow its currency to resume strengthening again, the macroeconomic impact on global trade and capital flows as well as on inflation rates will be limited.

The lack of significant change prompted a negative reaction from Diana Choyleva at Lombard Street Research, who wrote that

Beijing's attempt to throw sand in the eyes of the world with its announcement of increased yuan flexibility is set to backfire.

adding that

China's current policy stance means that the US will have to resort to import restrictions when it begins to dawn on policymakers that America's recovery is unsustainable and set to peter out by the end of this year. Unless there is a fundamental change in China's mode of development, it will be difficult to see the world not slipping into increased protectionism and every country/region having to fend for itself.

Professor Peter Morici of the University of Maryland is driven to anger stating that

China's announcement is a cynical ploy to assuage critics less than a week before G20 meetings and, without a substantial one-off revaluation of the yuan, Beijing's words are hypocritical and selfish.

Nothing the Fed does can appreciably accelerate US economic recovery or stem deflation as long as China continues to print yuan, buy dollars and US securities and make its products woefully cheaper than its comparative advantage warrants in the US and Europe.

On that note, Senator Schumer has already made dismissive noises about the currency reform.

Helen Qiao and Yu Song of Goldman Sachs are more positive, arguing that

This policy change demonstrates that the Chinese government has become more confident of the global recovery and more proactive in managing the risk of trade protectionism and global demand rebalancing.

Finally, Jerry Lou at Morgan Stanley sidesteps the geopolitical issues and looks at stock specifics.

We overweight companies with 1) renminbi revenue 2) dollar costs 3) assets that can generate future renminbi cashflows and 4) dollar debt. Top industry overweights - airlines, oil refiners and steel makers.

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