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After months of intense political pressure, China announced Saturday that it would allow its currency to gradually appreciate against the U.S. dollar. China's currency – the yuan – has been pegged to the American greenback since 2008.
"This is going to lead to a transition from export-lead, investment-lead to more of a consumption-lead economy going forward," Jing Ulrich, chair of China equities and commodities at JPMorgan Chase & Co. (NYSE: JPM), told CNBC. "I think the ramifications are profound not just for the next few months but actually for the coming years."
Not surprisingly, U.S. exporters embraced the news as an opportunity to compete against Chinese companies and to reduce the U.S. trade deficit. Foreign nations, including the Untied States, have accused China of undervaluing its currency to give its exporters an advantage in global trade.
"It's a real opportunity for American companies to expand sales in China," Mark Barrenechea, Chief Executive Officer of Silicon Graphics International Corp. (Nasdaq: SGI), told The New York Times. "Although this will increase some costs for American business that source to China, it also means that Chinese businesses can readily afford American exports."
Chinese domestic consumption stands to benefit the most, as consumers will have more purchasing power on top of China's recent wave of multi-industry wage increases. Western companies that reach out to Mainland China can access a consumer base with more money and an increased desire to spend, which should give Western investors a chance to cash in on climbing profits.
But not everyone will see immediate benefits from the new currency policy. In fact, the combination of big double-digit wage increases in China and an increase in the yuan will reanimate inflation.
U.S. shoppers will eventually feel the squeeze: As wages in China soar – adding to the cost of Chinese-produced products -U.S. retailers will be forced to raise prices and to pass those higher prices along to consumers.
Money Morning Contributing Editor Martin Hutchinson warns that investors need to prepare now for the inflationary currents that are heading toward the U.S. market.
"China will export these inflationary pressures into the U.S. market, meaning investors must position themselves for this eventuality," he said. "[T]he imports on which the rich nations too intently depend will rise in price. Thus, inflation will return to the ‘rich' countries – via the poor ones. For investors, the accompanying erosion of purchasing power will be difficult to deal with."
That brings us to next week's Money Morning Question of the Week: Given the developments unfolding half a world away in China, are you worried about a resurgence in inflation? If so, how are you preparing as an investor for the impact currency appreciation will bring to companies and markets? What about as a consumer? Do you think the gradual increase will have as much of an effect on global trade, retailers and economic growth as touted, or will the impact be muted?
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