Stronger yuan creates winners and losers

June 22, 2010 at 12:00a.m.

Associated Press

WASHINGTON

China’s decision to let its currency rise in value adds buying power to its exploding middle class — a win for American electronics makers, which can sell more computers and iPods to a hungry market.

At the same time, it puts a squeeze on U.S. retailers such as Walmart because Chinese imports suddenly cost more. And prices may not fall as fast for high-tech products made in China, such as cell phones.

What sounds like an obscure economic decision — China’s move to loosen its currency, the yuan, from the U.S. dollar and let the open market have more of a say in its value — has real-world consequences around the world.

It comes in a global economy so intertwined that some of the same industries could suffer and benefit at the same time. American steel companies, for example, gain an edge because their Chinese competitors’ products become costlier. But China imports raw materials such as coal to make steel. Those costs will now drop for China.

Or take electronics. Apple can sell more iPods and iPads to China, where customers will now be able to afford more. But Apple also depends on China to manufacture many of its products, so its production costs could rise.

China’s central bank said over the weekend that it would loosen the yuan’s peg to the dollar and allow it to gradually strengthen. The yuan rose to an exchange rate of about 6.8 to the dollar Monday, from 6.83, where it had been kept for two years. Most other currencies already go up and down against the dollar on the open market.

Economists expect that if the yuan rises further, it will happen slowly, and have only a limited effect on American industries in the short run. Over time, though, U.S. exports to China could be cheaper, and Chinese imports to the U.S. more expensive.

The decision was largely political: China was seeking to defuse complaints that it deliberately keeps its exports artificially cheap to strengthen its hand against inflation and keep its economy humming.

Without action, the United States, Europe and some developing countries would have pushed China at this weekend’s summit of the Group of 20 leading economies to let its currency float. China has now largely taken the issue off the table, economists said.

Wall Street appeared to like the move at first. The Dow Jones industrial average rose nearly 150 points early Monday. But traders came to realize that there was little short-term help for the U.S. economy in the move, and the markets finished roughly flat.