China Revalues Yuan

This morning the Chinese government announced that they would no longer peg their currency, the Yuan, to the US dollar. Instead the Chinese will peg the Yuan to a basket of currencies, allowing the value of the Yuan to fluctuate in relation to other currencies.

This is a good move. Moving away from a fixed exchange rate allows the market to price the Chinese currency. This removes an artificial barrier and no longer requires the Chinese to intervene in currency markets to preserve an artificially low value for their currency, although they may still choose to like the Japanese do.

The Yuan will no doubt appreciate in relation to the dollar, which is the news US investors in China have been waiting for. The appreciation of the Yuan increases the value of any Chinese holdings in dollar terms.

However, the revaluation is not the cure all that US manufacturers think it is. If you listen to a number of protectionist Democrats, Chuck Schumer for one, you would think that the drop in US manufacturing employment is solely based on Chinese currency prices. Unfortunately the causes of the changes in the US economy are much deeper.

Chinese workers earn something like $2 per hour (in purchasing parity terms) while US workers on average earn a little under $20 per hour, while US workers are much more productive than their Chinese counterparts, but they are also about ten times as expensive. So far it appears that the Yuan will not have a huge initial move since it is now pegged to a basket of currency, not just the dollar. However, even a 10 or 20% move would not fundamentally change the balance between Chinese and US workers.

Other Thoughts

AMGN reported huge earnings numbers two days ago. If you would have bought the biotech giant a month ago, it would be up 30 some percent now.

PFE reported yesterday. Everybody thinks big pharma is dead, pipelines look weak, biotech seems to be the next big thing. While pipeline and patent expiration issues are real, the biotech vs. pharma rivalry is not. Biotech may be the wave of the future, but big pharma still has tens of thousands of scientists doing billions and billions of dollars of research. I need to revise some work I did this spring, but it seems like the market is pricing some of these stocks like they will never have another big drug discovery, a potential opportunity for patient investors.

Timothy Burger
timothyb {at} timothyburger.com