Chinese Currency Reforms

For years, the U.S. has raised the issue that China has been unfairly manipulating its currency to gain an edge for its export-driven economy. Last month, ahead of the G20 Summit, China announced that it would allow for more exchange rate flexibility in its currency, the RMB, which led to a slight appreciation. China has indicated that the appreciation will be highly controlled and will not be allowed to fluctuate greatly, leaving many to believe that the RMB is still greatly undervalued.

The most significant result of the appreciation of the RMB is that it will put a strain on Chinese exporters and those businesses that rely on Chinese goods (e.g. Wal-Mart), ultimately leading to increased prices for American consumers. Even with only a slight 0.5% increase in June, many Chinese exporters (including those foreign companies that manufacture in China) have felt a squeeze on their profits.

The good news is that the rise in value of the RMB will open up many new opportunities for American businesses. Chinese consumers will have more buying power and will demand more foreign goods. The consumer luxury goods (automobiles, cosmetics, high-end retail) industry will be one of the largest benefactors, a demand U.S. companies are well-positioned to meet. In fact, both GM and Ford have both reported record sales this year and plan on expanding their operations in China. Chinese consumerism will drive the development and expansion of other industries as well.

Also, for those businesses with RMB assets in China, the rise in value of the RMB will also signal a rise in the value of those assets. Therefore, investments into China will likely appreciate in value along with the appreciation of the RMB.

It is inevitable that the RMB will appreciate in value; the only variables are when and by how much. For U.S. businesses, the key is to have a strategy in place so you are ready to take advantage of the opportunity.