The Chinese move to allow the yuan to appreciate upward to 8.28 per
dollar, after fixing it at 8.11 for years, is still being digested by
markets. However, it?s an interesting look at monetary policy as
practiced by the central bank of a country.
To the core of your question -- it?s a clear difference between a
fixed-exchange rate economy (China) and one that allows floating
exchange rates. China can only buy or sell currency to raise/lower
the currency value. A floating exchange rate country can do many more
things ? buy/sell foreign currency; change its interest rates and
money supply; manage credit quality ? and many other things (see the
?Monetary Policy? section of the Wikipedia article, referenced below).
Wikipedia?s article on monetary policy discusses how interest rates
and the money supply works. It makes a key point in the section on
the Central Bank: ?If the exchange rate is pegged or managed in any
way, the central bank will have to purchase or sell foreign exchange.
These transactions in foreign exchange will have an effect on base
money analogous to open market purchases and sales of government debt;
if the central bank buys foreign exchange, base money increases, and
?Monetary Policy ? Trends in Central Banking?
The Chinese had indeed been purchasing dollar-denominated bonds. The
impact within China was to increase the money supply, potentially
feeding inflation (though it has not been a serious problem within
China, as productivity is increasing).
With the change last week, the first impact was in the bond markets ?
with a decrease in prices and increase in yields. The Wall Street
Journal this morning notes that ?China could feel less need to buy
dollars to hold the yuan down.? The impact: high yields on everything
from Treasury bills to corporate bonds to mortgage interest rates.
The same Wall Street Journal article asks, ?Could China prick the
housing bubble?,? referring to the current rapid appreciation rate for
U.S. housing. It also notes that utility stocks declined after the
Chinese announcement, primarily because that industry?s stocks are
valued for their bond-like dividend yields.
What else happens with the upwards valuation of the yuan?
? imported American foods or raw materials are less expensive for Chinese consumers
? dollar-denominated goods, such as oil, is cheaper in China
? Chinese manufactured goods are all more expensive, leading to
cost-push inflation in the U.S.
? If a Chinese company is in the process of buying an American
company, as is being proposed by Cnoc (buying Unocal) or Qingdao Haier
(buying Maytag, an offer now withdrawn), the purchase price is lower.
It could to a rash of acquisitions by profitable Chinese companies.
? Exports in China make less in yuan
? Outsourcing of products or services to China are less attractive
? Chinese firms are worth more in dollars,
? Earnings for U.S. multi-nationals in China are worth more when
profits (and assets) are translated back into dollars
You might want to see today?s Wall Street Journal and the article
titled ?Yuan Move Might Stir Big Ripples.? It largely says that it?s
impossible to know what the long-term impact will be without knowing
what FUTURE moves of the yuan might be.
Google search strategy:
?monetary policy? + central bank