China Yuan Currency Revaluation Not All Good for the U.S.
Currencies / China Currency Yuan Sep 24, 2010 - 12:58 PM GMTBy: Hans_Wagner
The Obama administration and many in congress have been aggressively calling for a revaluation of the Chinese yuan vs. the United States dollar. As of September 22, the yuan has climbed for nine straight days setting fresh records against the dollar as the Chinese central bank changed the parity rate of the yuan to the dollar. As with any change, there are winners and there are losers because of the action by the Chinese government.
The Winners
A higher yuan relative to the US dollar means exports from the United States will cost less. Capital equipment manufacturers such as Caterpillar, Deere, and Boeing will benefit, as the prices for their equipment will drop accordingly. These companies might be able to hire additional people if their sales pick up.
The Chinese airlines will pay less for fuel and for airplanes as will the construction and mining companies buying capital equipment.
Farmers and food exporters will benefit as their goods face less price competition from domestic Chinese competitors.
Finally, the United States steel manufacturers and commodity exporters face less competition as the price of the comparable Chinese steel and Chinese commodities will be higher.
The Losers
The US consumer will pay higher prices for all products imported from China. Companies like Wal-Mart and Target will have either to raise their prices or absorb the price increase. Electronics companies like Dell, Hewlett-Packard and Apple who have factories in China and employ Chinese workers to make their products for the US market face the prospect of higher prices. This comes at a time when many consumers are barely getting by. The political fall out of this decision might make the administration and congress have second thoughts.
On the other hand, the higher costs might encourage more consumers to think twice before they buy a new TV or computer, choosing to save the money instead. China has complained that the United States should lower its excessive consumerism to help balance the trade deficit. A higher yuan will help is a small way.
Next, China’s economy might experience slower growth. Since the Chinese economy has been the global engine of growth, this could have broad consequences at a point in the economic cycle that needs as much signs of growth as it can get. If China’s growth slows, they will be less inclined to purchase products from the United States. Another unintended consequence.
The rise in the yuan and a depreciating dollar will drive up the price of commodities for everyone but China, again negatively affecting the global recover.
The Bottom Line
Investors will need to look at the total picture to get an idea of global effect of the of the yuan revaluation. Then carefully examine impacts any companies in your portfolio. Most likely, the price changes are already baked in for the impacted companies.
By Hans Wagner
tradingonlinemarkets.com
My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/
Copyright © 2010 Hans Wagner
If you wish to learn more on evaluating the market cycles, I suggest you read:
Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.
Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling. One of the best, easy-to-read, study of stock market cycles of which I know.
The Disciplined Trader: Developing Winning Attitudes by Mark Douglas. Controlling ones attitudes and emotions are crucial if you are to be a successful trader.
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