How Strong Chinese Yuan Impacts U.S. Economy

The People’s Bank of China has announced on June 19 that the bank will no longer peg it currency; the Chinese Yuan with other currencies. China’s government had been keeping its currency at artificially lower levels in order to provide support to Chinese exporters. The yuan was pegged to the US dollar during the economic downturn since 2008.
China’s decision to tolerate its currency flexibility will impact global investing and even the U.S. economy to a considerable extent. For example, strong Chinese currency can increase U.S. retail prices and U.S. exports, and send U.S. inflation to high levels. However, none of these economic consequences of the new flexible currency policy are expected to appear in near future.
The United States being one of China’s biggest trading partners, had been seeking this move since 2008. China had responded positively on the same issue back in 2005, and let its currency gain value against the USD till 2008. Yuan gained 21% against the USD over the period of 3 years. However, the global economic downturn left the exporting nation China no other choice but to peg its currency with the USD.
Now that China is again willing to appreciate its currency, we can expect investment from China flowing to the global markets. The stronger yuan means that the Chinese companies could buy more commodities and invest more in global markets, especially in the U.S. stock markets and real estate. Chinese demand can also boost exports of U.S. energy, tech and health-care sectors.
Retailers could be on losing side as they heavily depend upon inexpensive imported products from China. Higher value of yuan will drive the prices up and decrease their profit margins. On the other hand, the consumers could also pay the higher prices if the retailers like Wall-Mart increased the prices to retain their previous profit margins.