On Saturday 19 June, China announced plans to loosen the long-standing bonds tying the value of the Chinese yuan to that of the US dollar, prompting speculation of a boost to Asian markets.
In an effort to halt the yuan's seemingly unstoppable rise and the subsequent damage that strength was doing to Chinese exports, the Chinese currency was pegged to the dollar in mid-2008. It's a policy that has attracted a fair amount of criticism, particularly from the US as American exports (and jobs) suffered against China's resultant trading stength. The global financial crisis has seen that trading power take a significant hit, however, with China reporting a trade deficit at the beginning of 2010 for the first time since 2004. The current weakness of the euro has compounded the problem, reducing China's ability to export to European markets.
With the G20 meeting in Toronto this week, then, it seems unlikely that the timing of China's decision to untether CHY/USD is coincidental. The move has calmed markets' fears of a China-USA trade war, and could produce a correction in the artifically-supressed value of the yuan.
Good prospects for commodities and import
If the expected rise in the yuan does occur, Chinese imports are likely to see a significant boost, which would be good news for the resources sector, particularly big miners, as import prices to one of the world's largest consumers of raw materials begin to drop. Markets have already responded to this – the FTSE 100's top-ten performers, as of morning trading on Monday 21 June, were all miners.
A catalyst for Asian growth
The last time China loosened its currency controls, in June 2005, Asia saw a significant boost in the strength of both trading exchanges and local currencies – the chart below shows the Hang Seng's performance from 2005 up to the beginning of the credit crunch.
On Monday 21 June the Hang Seng once again received a significant boost from the unpegged Chinese yuan, closing with a rise of 3.1%. The Japanese Nikkei, meanwhile, was similarly lifted – ending the day up 2.4%. [1]
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Updated: 22/06/10
Source: [1] BBC News (21 June 2010). Chart data sourced from Bloomberg.
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.