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Monday, June 21, 2010 5:03 AM


Yuan Climbs Most in 20 Months - a "Whopping" .37 Percent; Are we Supposed to be Impressed?


Stock and commodities futures are up headed into Monday's trading on news that China has "unpegged" the Yuan. Please consider Yuan Climbs Most in 20 Months After China Signals End to Peg.

The yuan climbed the most in 20 months against the dollar and forwards jumped after China’s central bank relaxed a two-year peg before a Group of 20 summit this week.

The currency advanced 0.37 percent to 6.8010 per dollar as of 3:54 p.m. in Hong Kong, the biggest gain since Oct. 7, 2008, according to the China Foreign Exchange Trading System. The 12- month non-deliverable yuan forward rose 1.3 percent to 6.6276, implying traders are betting on a 2.6 percent appreciation.

The People’s Bank of China said on June 19 it will allow greater currency “flexibility.” Yesterday, it ruled out “large changes” in the exchange rate and said it will prevent “excessive” fluctuations. The central bank, which has accumulated $2.4 trillion in reserves by intervening in currency markets, said it will maintain the trading band and curb inflows of short-term speculative capital.

Intervention Risk

“We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang, Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the G-20 summit in Toronto on June 26-27.

U.S. Senator Charles Schumer said lawmakers will push ahead with proposals for trade sanctions until they are convinced the advance is fast enough to allow fair competition.

Textiles makers stand to lose the most from appreciation and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. Europe’s debt crisis has added to pressure on their earnings. Swift Umbrella Co., based in the southern Chinese province of Fujian, was forced by European buyers to cut prices 6 percent this year, Xu Youchuan, sales manager, said in a June 2 interview.
Given that China pegged the Yuan for nearly a year, of course this is the biggest move in 20 months. Moreover, before anyone celebrates with champagne, please note the Yuan advanced 0.37 percent, hardly a big deal.

The Euro has been swinging more than a percent a day and five percent a week.

China Buys Time at G-20 With Yuan Announcement

One way good way of looking at this situation is China’s Hu Buys Time at G-20 With Yuan Announcement
Chinese President Hu Jintao may have succeeded in removing the yuan’s valuation from debate at this week’s Group of 20 leaders’ summit, economists and political analysts say. How much time he’s bought depends on how flexible the currency will become.

“I think the announcement is in a sense preemptive and will probably keep currency off the agenda at the G-20 meeting, a well advertised Chinese goal,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. “My view is that they have at a minimum bought some time.”
China Plays Obama like Violin

An even better way of looking at the situation is China Plays Obama like Violin on Yuan Exchange Rate
You have to hand it to China for the way it played Obama like a violin. On Thursday and Friday China Warned Against Finger-Pointing while announcing the "yuan exchange rate of no concern to others" setting a confrontational tone for the G-20.

Today, China says Dollar peg is dead and vows yuan flexibility.

China got exactly the praise it wanted from US and European leaders in exchange for essentially nothing.

China did not agree to a timetable or an amount. In essence it was a hollow statement. By acting extremely tough, then throwing Obama a bare bone, it made it appear as if the action was meaningful.

It wasn't. I am not in favor of tariffs but I expect to see Schumer pressing ahead with protectionist legislation.
Whether this buys China some time with the protectionists in Congress remains to be seen. However, it is clear that China played its hand as good as conceivable possible with an extremely tough hard-line stance, followed up a day later with seemingly large concession.

Had China not played these games, no one would have been impressed with a pissy .37 percent move. Now, everyone is going gaga.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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