I wrote this the day after the Yuan revaluation but didn't get around to posting it. Many of the ideas are still not mainstream.
What you're not being told about the Chinese Yuan (RMB) revaluation:
There was a lot of chatter before China's recent announcement that a revaluation of the Yuan would benefit the US by making Chinese imports more expensive. This in turn would help to support domestic US manufacturing and US exports would become cheaper and more competitive in China. All in all congress had become pretty sure that a revaluation of the Yuan was going to cure all that ails the US economy.
Here are some of the truths
- A revaluation of the currency only affects the labor component of product price. Most exported Chinese products have significant inputs of metals, fabrics or other components that are imported. As the RMB becomes cheaper so do these imports. Apparently less than 10% of a product's cost is in labor so even a 10% revaluation is going to have no more than a 1% effect on the price the item can be imported into the US at.
- Chinese revaluation is going to have two effects on interest rates, it is going to drive them up and down. In the short term, a lot of speculative capital is going to head to China. That capital will be converted into Yuan and the PBOC will use the dollars to buy more treasuries therefore driving down interest rates. Over the medium to long term, China will be less of a buyer of US treasuries as exports to the US decrease which will happen as price goes up. China mainly buys treasuries today (or in effect US dollars) to keep the RMB's price down. As the RMB starts to float the PBOC will stop buying as many US dollars and eventually they will stop entirely this will drive interest rates up significantly in the US. This effect on interest rates will far outweigh the small benefits to domestic US producers.
- There are a few reasons why reported inflation has been low while apparently the price of everything around us has gone up by double digits. One of the reasons is a deflation in a range of products imported from China. The price of these good are effectively subsidized by the Chinese government. As the RMB's price rises, the goods deflation will turn into inflation and yet another class of products will start rising in price to join fuel and food! Maybe we will start to calculate the CPI excluding Food, Energy and Chinese Imports!
- As the RMB rises against the US dollar, imports of commodities become cheaper. For the same cost China can import 2% more of the world's commodities. As many commodities are already in deficit, this will accelerate and commodity prices like fuel and metals (which are inputs into most things) will rise even more and not linearly.
The net effect of these forces is the opposite of the effect congress is looking for.
- Interest rates will increase significantly,
- Inflation will rise (which will further increase interest rates),
- Goods prices will go up for those who can least afford them,
- Commodity prices will rise as demand increases while supply remains constant
I doubt this was anyone's objective but Chinese tourism to the US will probably increase as a US holidays become much cheaper.
All these factors are more or less bullish for commodities.