• Progressive and moderate yuan appreciation will happen but for Chinese not US reasons--domestic inflation on the mainland, 2.7% in February, was a 16-month high.
  • A stronger yuan will make foreign imports cheaper and benefit Chinese manufacturers and assemblers who import vast quantities of raw materials and components.
  • A valuable yuan enhances the Chinese consumer's purchasing power. Western luxury goods are popular in China and may help to divert some of the money flowing into the property market. The potential for popular dissatisfaction is never far from the minds of the Beijing rulers; consumerism is a possible antidote.
  • China is willing to appear as a good world citizen and to be responding to the concerns of her trading partners. The reasons for the yuan policy change are domestic but the Chinese are certainly capable of getting as much good publicity from the move as possible
  • The summoning of Treasury Secretary Geithner toBeijing from his India trip was a deliberate statement of power for consumption in Asian capitals. China and India compete for influence in Asia. India may be a democracy but when China beckoned, the United States responded.
  • The model for yuan appreciation would be the previous bout from 2005 until July 2008 when the currency gained about 21% against the dollar.
  • Yuan NDFs are predicting a 3% appreciation within a year. The yuan has been pegged at about 6.8300 to the dollar since July 2008.
  • The appreciation will not attract as much extra capital as predicted --which would fuel inflation--because the revaluation has been the market bet for months.
  • Currencies: some yen proxy support against the dollar but only mild dollar weakness because the yuan will appreciate against all currencies not only the dollar. The improvement in US/China trade terms will be a benefit for the US trade balance and a perceived but questionable benefit for the American economy.

Joseph Trevisani
Chief Market Analyst
FX Solutions