The afternoon deal: Yuan politics

The markets cheered China’s move on the yuan but its not all good news reports Scott Malone. Risks abound.

For the corporate winners and losers here is a quick breakdown. WSJ has graphics on winners and losers here.

Chinese policy is often viewed with a healthy dose of skepticism but on this occasion the distrust is unwarranted, Forbes reports. A firmer yuan is beneficial to China and the new policy sends a signal that the country is confident in it prospects going forward.

Some currency traders were caught off guard with China’s move on the yuan. The crisis in Europe and the lingering economic downturn in the U.S. had some investors thinking China would not change its policy, the WSJ reports.

A stronger yuan may boost domestic demand, making consumers a key driver of growth, Bloomberg reports. A stronger currency will make foreign goods cheaper for both consumers and companies. From the contrarian point of view, yes a cheaper dollar against the yuan looks like it may boost U.S. exports, but it will not. The Chinese will be buying domestic goods.

Dealing with the yuan

A stronger yuan will have many side-effects, including in the world of deals. Chinese companies, like consumers, will have more money to play with and put firms across the globe in play. And for those buying into a Chinese company, things may get lot more expensive.

China is allowing more flexibility for the yuan, sending the currency soaring Monday to its highest level against the dollar since the landmark 2005 revaluation.

Most traders are maintaining forecasts for the yuan to rise a maximum 3 percent in 6 months and 5 to 6 percent in a year.