By MarketWatch
LOS ANGELES (MarketWatch) -- When an economy the size of China's takes a step, smaller players sometimes need to scramble to avoid getting squashed underfoot.
Beijing's announcement over the weekend that it would loosen its de-facto peg to the U.S. dollar is -- on the face of it -- such a move, and one of the most obvious groups affected are foreign firms who do business in China.
Labor problems have let offshore owners of Chinese factories -- from Japan's Honda (JP:7267 2,690, -46.00, -1.68%) /quotes/comstock/13*!hmc/quotes/nls/hmc (HMC 29.75, -0.33, -1.10%) to Taiwan's Foxconn (HK:2038 5.94, +0.33, +5.88%) /quotes/comstock/11i!fxcnf (FXCNF 0.70, 0.00, 0.00%) -- to promise higher wages. If the Chinese yuan starts to march upward against other currencies, those pay raises will eat further into margins denominated in Japanese yen or Taiwan dollars.
Then there's the case of Hong Kong. A river of mainland Chinese money already flows to the former British colony, as the well-heeled buy into Hong Kong assets, especially real estate. Hong Kong's currency is firmly pegged to the U.S. dollar, so if the yuan rises, their prices will only look more attractive to the mainland's investors.
Of course, questions remain over how quickly the yuan will move against the dollar, and even what direction it will go over the medium term.
The People's Bank of China's statement on the new policy decision has emphasized that changes in the yuan's exchange rate will be gradual. See full story on China's loosening of yuan. Certainly, the central bank will still restrict the dollar-yuan rate from rising or falling more than 0.5% a day, and some analysts say the pair is unlikely to drift more than 5% between now and the end of the year.
The People's Bank of China's statement on the new policy decision has emphasized that changes in the yuan's exchange rate will be gradual. See full story on China's loosening of yuan. Certainly, the central bank will still restrict the dollar-yuan rate from rising or falling more than 0.5% a day, and some analysts say the pair is unlikely to drift more than 5% between now and the end of the year.
Meanwhile, some contrarians question whether the loosening necessarily means a rise in the yuan against all its rivals.
Caixin Online reported prior to the yuan announcement that the currency's real effective exchange rate (which takes currencies other than the greenback into account) rose 3.37% during May alone. This is because the effective dollar peg forced the yuan to rise against the euro, a currency that features significantly in China's trade account.
With China's trade surplus with the world having narrowed from its previously gaping width, the upward pressure on the yuan that existed some years back, when Western officials ratcheted up their calls for appreciation, is no longer as much of as a factor as it once was.
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