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Removing the Peg from the Chinese Yuan

The likelihood of the Chinese Yuan starting to appreciate relative to the U.S. Dollar has increased recently as a result of pressure from the U.S. government on the Chinese government to lift the so-called “peg” that is in place between the Chinese Yuan and the U.S. Dollar in addition to mounting concerns that inflation is completely eroding the current rate of interest that Chinese investors are earning on bank deposits.

According to current policy in China, the Yuan is not allowed to move more than 0.5%, positive or negative, against the U.S. dollar on each given trading day. This policy has prevented the currency from floating freely each day and resulted in the value of the Yuan vs. the U.S. Dollar essentially being unchanged since the middle of 2008. Not only has the currency not been allowed to float but interest rates have been kept low by the Chinese Government despite evidence of increasing inflationary pressures within the Chinese economy.

It now appears that the Chinese government will bow to both pressures and raise interest rates while also removing the currency peg. Such changes should likely result in a strengthening of the Chinese Yuan which could help U.S. multi-national companies who export into the ever expanding China market.

All of this could be perceived positively in the sense as we at Hennion & Walsh believe that the U.S. needs the spending abilities of countries such as China to grow out of this particular recession.

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