Yuan Hits New High as U.S./China Meetings End

Treasury Secretary Henry Paulson and his delegation have finished the latest round of Strategic Economic Dialogue meetings in China. Overall, Paulson seems pleased with the progress made, but says there is still much work to be done. Regarding yuan appreciation, Paulson acknowledged the pace has increased in the past year, but said the two sides have agreed to the principle of appreciation, rather than talking about "how fast is fast." The yuan rose to its highest level, 7.3692, since ending its peg with the dollar in July 2005. Separately, it was announced China will allow qualified companies to sell yuan-denominated shares and locally incorporated foreign banks to sell yuan-bonds. However, this may have a counter effect, because: "If a foreign company doesn't need to bring a billion dollars through foreign direct investment, but can raise that money onshore, then you don't have to bring in that capital," explained Stephen Green, senior economist at Standard Chartered Bank in Shanghai. HSBC (HBC), Coca-Cola (KO) and Siemens (SI) are said to be considering a Shanghai Exchange listing.

Among other developments, China said it will study foreign investment in domestic brokerages, something it halted last year, although there was a recent report of Credit Suisse (CS) and Morgan Stanley (MS) forming joint ventures (full story). Stocks fell sharply across Asia, including a 2.7% drop in Shanghai to fall below 5,000 again (full story). ETFs FXI, GXC and PGJ, as well as closed-end fund CAF, all offer U.S. investors broad exposure to Chinese equities.

Sources: Bloomberg, Reuters, Wall Street Journal
Additional Reading: Beijing Vows to Tighten Liquidity, Rattling Shanghai Red-Chips • China's Inflation Hits 11-Year High, Trade Surplus Widens • Talk of China 'Overheating' Continues to Be Wrong

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