China's Currency Shift Boosts Markets, But Risks Ahead

Strategic Insights -

Asian markets surged Monday as the Chinese yuan, known as the renminbi, rose to its highest value against the dollar in 20 months, driven by the People's Bank of China's decision to allow limited flexibility in its currency. The move has sent a positive signal to companies with a presence in China, such as Caterpillar Inc., which expect to make gains if the yuan appreciates. However, the change is seen as a cautious step by the Chinese government, aiming to placate world leaders ahead of the G20 summit meeting in Toronto this week. Analysts warn that the limited flexibility allowed by the bank is a "cynical ploy" that may not address the underlying issue of the yuan's undervaluation, estimated by some to be as high as 50 percent.

Key Takeaways:

  • The Chinese yuan rose 0.42 percent against the US dollar Monday, the highest value in 20 months, after the People's Bank of China announced it would allow limited flexibility in its currency.
  • Caterpillar Inc. shares jumped 3.49 percent Monday morning, as the company is expected to benefit from a more appreciated yuan.
  • The Dow Jones industrial average rose 78.83 points, or 0.75 percent, to 10,529.47, while the S&P 500 index rose 6.37 points, or 0.56 percent, to 1,123.88.
  • The Nasdaq composite index added 26.58 points, or 0.28 percent, to 2,316.38.
  • The People's Bank of China's decision is seen as a cautious step to placate world leaders ahead of the G20 summit meeting in Toronto this week.
  • Analysts, including Economics Professor Peter Morici, warn that the limited flexibility allowed by the bank may not address the underlying issue of the yuan's undervaluation.
  • Patrick Mulloy, a member of the U.S.-China Economic and Security Review Commission, told CNN that the yuan float will need to move fast to catch up with its actual value disparity to the dollar.

Statistics:

  • The yuan rose 0.42 percent to 6.7976 against the US dollar Monday.
  • Caterpillar Inc. shares jumped 3.49 percent Monday morning.
  • The Dow Jones industrial average rose 78.83 points to 10,529.47.
  • The S&P 500 index rose 6.37 points to 1,123.88.
  • The Nasdaq composite index added 26.58 points to 2,316.38.
  • Analysts estimate the yuan's undervaluation to be up to 50 percent.
  • The People's Bank of China announced plans to make the exchange rates more flexible, but said it wants to keep the yuan stable without any one-off revaluation.

Sources:

  • UPI, "Renminbi's gain boosts markets early" (June 21)
  • RIA Novosti, "Belarus vows to keep gas headed to Europe" (June 21)
  • The New York Times, "China: Int'l leaders look for red herrings" (June 21)
  • The Daily Mail, "China warns international community of false expectations" (June 21)
  • CNN, "Asian markets advance on China news" (June 21)
  • China Daily, "China's central bank says it will keep yuan stable" (June 21)