So The Yuan is About to Get Stronger. So What?

Looks like China is getting tired of its label as a currency manipulator!

In an article included the newly-published book detailing the latest policy changes made in China’s 3rd plenum, People’s Bank of China (PBOC) Governor Zhao Xiaochuan stated that the central bank will “expand the renminbi [yuan] trading band” in order to make the currency more flexible and market-driven.

What got the investors more excited is that the PBOC is also planning on stopping its regular currency intervention altogether. This means that the market players will be free to push the yuan higher as they buy more Chinese assets.

Impact on the global economy

With the PBOC slowly allowing yuan appreciation, China’s export products will inevitably become more expensive. This will make exports from other countries more competitive, which could help boost their respective economies. At the same time, domestic consumption in China could also pick up as imports from the Western economies become cheaper.

With other countries enjoying less competition from Chinese exports and more demand from Chinese consumers, the existing global trade imbalances could start to improve.

Impact on the U.S. Dollar

Will a strong yuan immediately mean gloom and doom for the Greenback? Maybe, but not anytime soon. It may take years, even decades, before the world markets accepts the yuan as a global currency. For one thing, China would also have to allow a lot more foreign investors to get their hands on Chinese assets in order for that to happen. Not only that, but the PBOC probably wants the yuan to appreciate slowly to avoid unnecessary negative economic impacts.

Impact on the other major currencies

As I mentioned above, a strong yuan would benefit export-related economies like Australia, New Zealand, the euro zone, and even the U.S. If these economies enjoy better trade balance numbers and slightly higher economic growth, then maybe their respective central banks won’t need to talk down their currency and stimulate their economies as much.

Again, don’t expect to see the changes above anytime soon. This taking over the world business takes a long time. Heck, we’ll probably see a zombie apocalypse first before we see a legitimately strong yuan! But hey, at least now you know why any news about more yuan strength is taken positively by the higher-yielding currencies, right?