Markets jump on renminbi announcement

Trading started brightly on Monday after the weekend move by China on the renminbi, with stocks rising across Asia. AFP/CNA reports:

China's announcement at the weekend that it would make its currency more flexible sent Asian stocks soaring on Monday, with the yuan hitting a five-year high against the dollar.

Shanghai stocks jumped 2.90 percent and Hong Kong surged 3.08 percent. Tokyo's Nikkei rose 2.43 percent, Sydney added 1.33 percent and Seoul gained 1.62 percent.

The move also sent the gold price soaring to a record high in Hong Kong as the weaker dollar made the precious metal more attractive...

The Chinese currency surged to 6.7974, its highest level since a revaluation by Beijing in July 2005 but still within the 6.7934 to 6.8616 trading range.

However, by the end of the day, some of the exuberance had vanished. Bloomberg reports:

U.S. stocks fell, slowing a global rally, as the Standard & Poor’s 500 Index failed to remain above levels watched by traders and optimism about China’s plan to relax the yuan’s fixed rate to the dollar faded in the last hour. Commodities pared gains and Treasuries trimmed losses.

The S&P 500 slipped 0.4 percent to 1,113.2 at 4 p.m. in New York after jumping as much as 1.2 percent in the first hour. The Reuters/Jefferies Index of commodities trimmed a 1.6 percent rally to less than 0.3 percent. Ten-year Treasury yields rose 3 basis points to 3.25 percent after surging 8 basis points. The losses in U.S. stocks weren’t enough to erase gains in the MSCI World Index, with the developed-markets gauge rising 0.5 percent for a 10th straight advance, the longest streak in 11 months.

Bloomberg also reports that the boost to Chinese stocks came from the notion that interest rate increases are now less likely.

China’s stocks rallied the most in almost a month, led by banks, airlines and property companies, on the prospect that a stronger yuan will tame inflation and reduce the need for interest-rate increases.

Still, a stronger currency could dent economic growth. Barry Eichengreen and Andrew Rose report that historically, countries tend to see slower growth in the years following removal of a currency peg.

The average annual rate of GDP growth slows by 1 percentage point between the five years preceding the exit and the five years following. But there is no growth collapse. Exiting up does not doom the economy to a Japanese-style lost decade.