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Investment Implications of a Future Chinese Currency Revaluation
Source: www.vanguard.com
Topic: Currency
Sort Desciption: a more exible, market-driven currency. ... controls associated with the country's pegged currency ... near-term policy response is a currency revaluation ...
Content Inside: Investment Counseling & Research / A N A L Y S I S Investment Implications of a Future Chinese Currency Revaluation Executive Summary The long-run sustainability of Chinas recent growth into a developed economy rests critically on greater integration with global nancial markets. Achieving such integration will ultimately require a more exible, market-driven currency. However, immediate adoption of a freely oating exchange rate would not serve Chinas best interests, because the capital controls associated with the countrys pegged currency are vital to maintaining stability in its banking system. Chinas most likely interim response is a currency revaluation in which the yuan stays pegged to the U.S. dollar, but at a higher rate. While the prospects for such action have been widely discussed in global nancial media, the ramications for investors remain opaque. This report provides investors with model-based estimates of the potential impact of a revaluation. We nd that the direct result of a one-time Chinese revaluationa weaker U.S. dollarwould raise U.S. ination only marginally. A successful revaluation would also reduce the Chinese central banks need to purchase U.S. Treasury securities in large quantities. We nd that this development would have virtually zero impact on short-term Treasury yields. Although less widely discussed, the cessation of Japanese central bank purchasesa near-term possibility, thanks to the regional economic resurgence spurred by Chinawould have a larger impact on U.S. Treasury yields than would a Chinese revaluation. Our simulations indicate that a curtailment in Treasury purchases by the Bank of Japanthe largest single overseas holder of Treasury debtwould lead to an immediate 10-basispoint rise at the short end of the Treasury yield curve. Introduction Economists have long associated a nations long-term economic development with the quality of its nancial markets. Despite the remarkable pace of Chinas economic growth over the past deca ...
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