Some win and some lose in China’s decision to loosen yuan from US dollar

By Christopher S. Rugaber
Associated Press / June 22, 2010

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WASHINGTON — China’s decision to let its currency rise in value adds buying power to its exploding middle class — a win for American electronics makers, which can sell more computers and iPods to a hungry market.

At the same time, it puts a squeeze on US retailers like Wal-Mart because Chinese imports suddenly cost more. And prices may not fall as fast for high-tech products made in China, like cellphones.

What sounds like an obscure economic decision — China’s move to loosen its currency, the yuan, from the US dollar and let the open market have more of a say in its value — has real-world consequences around the world.

It comes in a global economy so intertwined that some of the same industries could suffer and benefit at the same time. American steel companies, for example, gain an edge because their Chinese competitors’ products become costlier. But China imports raw materials such as coal to make steel. Those costs will now drop for China.

Or take electronics. Apple can sell more iPods and iPads to China, where customers will now be able to afford more. But Apple also depends on China to manufacture many of its products, so its production costs could rise.

China’s central bank said over the weekend that it would loosen the yuan’s peg to the dollar and allow it to gradually strengthen. The yuan rose to an exchange rate of about 6.8 to the dollar on yesterday, from 6.83, where it had been kept for two years. Most other currencies already go up and down against the dollar on the open market.

Economists expect that if the yuan rises further, it will happen slowly, and have only a limited effect on American industries in the short run. Over time, though, US exports to China could be cheaper and Chinese imports to the United States more expensive.

The decision was largely political: China was seeking to defuse complaints that it deliberately keeps its exports artificially cheap to strengthen its hand against inflation and keep its economy humming.

Without action, the United States, Europe, and some developing countries would have pushed China at this weekend’s summit of the Group of 20 leading economies to let its currency float. China has now largely taken the issue off the table, economists said.

From construction machinery to cars to planes, US manufacturers should benefit from this weekend’s decision. Automakers could earn more profit from the cars they make and sell in China.

Poor countries also could see a boost from the decision. As pay rises in China, the production of lower-value items has already begun to shift to countries like Indonesia, Pakistan and Vietnam, economists said. A stronger yuan could accelerate that trend.

But the decision also could drive up prices for some US retailers and consumers. Eight of the 10 largest importers from China are retail companies, according to Panjiva, an international trade data service. They include well-known giants like Wal-Mart Stores Inc. and Lowe’s Cos. A more expensive yuan should make Chinese-made goods sold in US stores analysts say.

In addition, components for cellphones, personal computers, and other electronics are largely manufactured in China. So as the yuan rises in value, those parts get more expensive.