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Be Careful What You Wish For: 4 Reasons Yuan Revaluation Could Backfire

|Includes:DIA, FXI, GOOG, GXC, PGJ, QQQ, SPDR S&P 500 Trust ETF (SPY)

William Pesek of Bloomberg has an intriguing article on the revaluation of the Chinese Yuan. While many government officials, economists, etc are clamoring for the Chinese to lift the peg keeping its currency in a tight range with the dollar.

 

Pesek lists 4 reasons why such a move may backfire:

1) Inflation: According to Pesek, a stronger Yuan could devestate the "Walmart Economy." Evidenced by a large trade surplus with China, the US consumer buys a lot of cheap products from China. A sudden increase in prices would be a "shock to the bargain." U.S. inflation data, which has been muted in recent months could see a sudden surge.

2) Market Turmoil: Tensions between the US and China have been increasing. There are growing calls with in the US to label China as a "currency manipulator." As tensions mount, markets around the world will be volitile which each press statement and every remark by government officials as the world's largest economic powers square off.

3) A Chinese Slowdown: The Chinese economy has been an engine of growth for the economic recovery. Pesek notes that the economic consequences of say a 10% revaluation of the Yuan vs. the dollar is unknown. The Chinese Government's legitamicy is largely premised on rapid growth. Underestimating China's fragilities could be a major problem; less GDP growth means less toleratnce for government policies, which could lead to greater unrest. Can a worldwide economic recovery continue with a slower growing China?

4) Increasing China's sphere of influence: Pesek mentions China has been pumping billions of dollars into emerging markets in Asia, Latin America, and Africa, often at the expense of US strategic interests. Each increase in the Yuan grows its worldwide influence.

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