Yuan will big change happen?

The Chinese Government took away one of the major sources of trade tension with the United States when it agreed to relax controls over the value of its currency. The Chinese yuan has been pegged to a constant value ($US1 to 6.83 Yuan) against the US dollar for much of the past 2 years. This has helped the Chinese sustain a massive trade surplus with the US, and fill the shelves of the Walmart chain (and other department stores) with cheap goodies.

Given that the Chinese financial system owns the US landmass after the debacle caused by the housing crisis, having it dominate trade as well has been too much to swallow. As the G20 meeting of the leaders of major economies (this time just “G19” as the new Australian PM took a leave pass to sort out a few redirections of policy) loomed, the grievance of the currency imbalance was a major agenda item for the Americans.

The change in currency values – which will see a revaluation upwards in the value of the yuan – may have a major impact on trade. It has been touted as the most significant trade development of 2010 given the scale of the trade between the two countries, and the knock-on effects of an alteration in those trade flows on other major traders. The currency situation has given Chinese exporters a major advantage as the value of the US dollar tumbled to reflect the poor state of its economy.

A stronger yuan can partly reverse that effect, although the scale and maturity of the trade balance between the superpowers hasn’t happened because of the financial crisis. It has been building steadily since 2004 as the might of the Chinese production engine became a compelling source of consumer products for the stressed US shopper.

But China won’t rapidly revalue their Yuan. Their government is managing a very delicate balancing act – and will be for some time – as it tries to deflate a few massive bubbles that have developed in its economy which, if popped, will make the GFC look like a pub chook raffle.

The weight of expectation of currency players would have driven the change quickly, but the Chinese will continue to closely regulate their currency to play this change out over time. It will follow a “Pantene effect” – it won’t happen overnight but it will happen. The Chinese are trying to gradually shift their growth engine from exports to greater household affluence, which will take years not months. So that means it also won’t change much for the complaining US politicians, but it will take the heat out of the issue so that they can focus on some of the things they can control.

The reality of a gradual impact didn’t stop our currency reacting to give our agricultural exporters more grief, with the $A rising on the expectation that it will possibly make the value of exports to China a little cheaper, and also help the Chinese fight a building inflation rate. This will also hold interest in resource commodities which have been affected by anxieties about the sustainability of the growth in demand from the Chinese nation-builders. It will also affect competitiveness of the cost of Chinese goods, which have been losing some of their advantage of late with rising labour costs.