Global stocks rally on stronger yuan policy

PUBLISHED : Tuesday, 22 June, 2010, 12:00am
UPDATED : Tuesday, 22 June, 2010, 12:00am

Global stocks rallied yesterday as the yuan soared to a five-year high and investors bet the stronger currency will ease the impact of the euro-zone debt crisis on markets.

The yuan pierced the 6.8 barrier, hitting 6.7969 to the US dollar after Beijing dropped the currency's de-facto two-year peg to the dollar. The spot rate of the yuan was up 0.43 per cent based on yesterday's high at 6.7969 and Friday's close of 6.8262.

The Hong Kong equity market benefited from the appreciation with the Hang Seng Index closing up 625.47 points or 2.43 per cent at 20,912.18 points.

In London, the FTSE index closed 0.92 per cent higher, and in early afternoon trading in New York, the Dow Jones industrial index was up 0.53 per cent but off its earlier highs.

Some analysts were less excited, saying that the announcement by Beijing was mainly strategic and as a result the scope of the appreciation would be disappointing.

'Today's gain is small, but enough to ease tensions at the forthcoming G20,' wrote Ben Simpfendorfer, chief China economist at RBS, in a research note. 'I am reluctant to tweak gross domestic products, export, and policy forecasts.'

Beijing has not indicated how much the yuan may appreciate, but a statement by the central bank at the weekend said the exchange rate would remain 'basically stable'.

It is likely that the other countries in Asia will follow China's lead by allowing a stronger domestic currency, said Frances Cheung, of French investment bank Credit Agricole.

Cheung estimated that the yuan could hit 6.73 to the US dollar by the end of the year, an increase of 1.5 per cent since the beginning of this year.

CLSA analysts Francis Cheung and Manop Sangiambut said the yuan appreciation might trigger a rally in the MSCI China Index, covering H shares, B shares and red chips.