You're the Yuan That I Want

By Eric Jackson
RealMoney Contributor
6/21/2010 9:00 AM EDT
Click here for more stories by Eric Jackson

I have been bullish on China for some time. News over the weekend that Beijing was going to allow the yuan to float in some manner within the next year has been very positively received by the global equity markets. It's bullish for the Chinese economy, and global equities, but it's also very good news for Chinese equities. Here's why.

Although the United States has been bellyaching about the yuan's peg to the dollar for a long time, I actually expected no change in Chinese policy. After all, put yourself in China's shoes: Keeping the yuan tied to the dollar was continuing to support the growth of Chinese exporters globally. The Chinese government remembers well how quickly export demand dropped after Lehman Brothers failed. As a result, many factories went from running full tilt in China to laying off workers and lying dormant. Bustling barges in the Yangtze and Pearl Rivers, with incoming raw materials and outgoing exports, suddenly stopped.

It's because of this drying up of global demand that Beijing was forced to pump a $600 billion stimulus package into the Chinese economy to get the wheels turning to keep GDP ticking over at the pace it needs to support its growth and unemployment targets. Along with the stimulus, the Chinese government mandated the country's banks to push forward lending. It also accelerated a push to transition the overall economy from an export-driven one to a domestic- or consumer-driven one.

China is still dependent on exports and will remain so for several years to come. However, you would have to view its efforts to shift the country's economic emphasis so far as successful. It got the economy rolling again and, when foreign Cassandras started complaining there was a property bubble in the works, it preemptively pricked that bubble -- in about a month. All the most recent data out of the major Chinese cities suggest real estate has cooled, yet growth continues and inflation is tame.

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content