This article has been adapted from our sister site across the pond, Fool UK.
What a difference 0.42% makes. That's how much the Chinese yuan appreciated against the U.S. dollar yesterday, but in the eyes of equity traders it moved a mile. Or rather, the Chinese authorities have.
The yuan began appreciating against the greenback in 2005. But since mid-2008 China has effectively pegged its currency at 6.83 yuan to the dollar, in response to the global downturn.
Many Western politicians and economists have criticized that exchange rate as artificially low, designed to help China's exporters at the expense of their Western counterparts.
Only last Wednesday, President Obama wrote to the other G20 members to say, "The signals that flexible exchange rates send are necessary to support a strong and balanced global economy."
With the signals that the weakened euro has sent having driven the markets into a tizzy, there's no doubt that the unnamed currency he was talking about was the yuan -- and that the message was aimed at China.
Beijing recently warned that its currency was its own business, and the stage was set for a clash at the G20 summit this weekend in Toronto. Yet in a surprise to rival any result from the World Cup in South Africa, the Chinese authorities on Saturday moved to head off such a bust-up by stating that economic conditions now allowed for a "more flexible" yuan.
And yesterday the People's Bank of China (PBOC) lived up to this policy shift, standing aside as the yuan appreciated close to the maximum 0.5% rise against a basket of currencies that the Chinese authorities' targeting system permits.
Miners' mini-rally
The joy in the markets on Monday morning was almost palpable. It was most evident in mining stocks, which soared on the expectation that Chinese factories will be able to buy more dollar-priced commodities -- or pay higher prices -- as their yuan stretched further.
The following table shows how resource companies rallied in the wake of the tiny revaluation:
|
Company |
Closing Share Price |
Rise on the Day |
|---|---|---|
|
Anglo American |
2471p |
3.6% |
|
Antofagasta |
920p |
4.8% |
|
BHP Billiton |
2034p |
4.8% |
|
Rio Tinto |
3489p |
4.9% |
|
Xstrata |
1076p |
4.8% |
|
Vedanta |
2467p |
5.8% |
Quoted prices reflect London Stock Exchange listings.
Analysts also pointed to banks like Standard Chartered and HSBC
In practice, it will take months to understand the true effect of a gradually strengthening Chinese currency rippling through the global economic system, and to clarify who will gain and who will lose -- assuming, of course, that the PBOC allows the yuan to keep appreciating. Putting short-term market moves down to the bigger macro picture is a risky business.
Also, the true significance of China's move may be what doesn't happen.
For starters, there's much less chance of an unhelpful disagreement between the two most important economic powers at the G20 summit. A trade war between China and the U.S. seems less likely now, too.
A significantly stronger yuan might also help cool Chinese inflation, which may stop the authorities from tightening money supply to temper the red hot economy as quickly as some had feared.
Rates matter
What we certainly shouldn't do is get carried away with the significance of China's move, or over-estimate its immediate impact on the big imbalances in the global economic system -- in particular trade between the U.S. and China.
The financial academic Niall Ferguson pointed out yesterday that China would have to undertake a yuan revaluation of 25%-30% to make a significant dent on the U.S.-China trade imbalance. Nobody expects that anytime soon. Ferguson is with the market in looking for closer to 3% over the next 6-12 months.
That said, the Harvard historian also pointed to the U.S. real estate crash as the root cause of the global downturn -- without adding that it was cheap money facilitated by low interest rates in the U.S. that set the scene for that event. And it was China's willingness to buy vast quantities of U.S. Treasuries at low yields that helped keep U.S. interest rates low.
What happens next on that front isn't clear. If China's export growth slows and its consumers use their strengthened currency to buy more imports, China may not have so much in the way of excessive foreign money to park in U.S. bonds, for instance.
China buys the recovery
Very short-term speculation is inherently dangerous, but I think China's move should be good news for risky assets such as shares.
Ironically -- given its communist history and its present day state-run version of capitalism -- China has read the global economy at least as well as its rivals in recent years. If China believes it can permit the yuan to appreciate -- and in doing so dent the artificial edge its exporters enjoy -- then that may mean it is confident the global economic recovery is still on-track.
Most equity markets look cheap if it's right.
More by Fool U.K.'s Owain Bennallack:
