Asian markets jump as China’s currency-peg shift boosts global growth hopes

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Asian stock markets rallied Monday after China signaled a willingness to let its currency appreciate, ending a tight peg to the dollar’s value.

Although there isn’t likely to be a sharp move in the Chinese yuan anytime soon, some investors were betting that the decision would be bullish for global growth longer-term -- in part by giving Chinese consumers and companies more purchasing power via a stronger currency.

Japan’s Nikkei-225 stock index was up 2.4% in late afternoon trading Monday. Key market indexes were up 1.9%, in Taiwan, 1.6% in South Korea and 1.9% in Singapore.

In China, the Shanghai composite index rose 2.7%. Hong Kong’s Hang Seng index was up 3.1%.
Some investors may be betting that, at a minimum, Beijing’s surprise move will lessen the chance of a trade war between the U.S. and China.

Beijing has held the yuan steady against the U.S. currency -- at 6.83 yuan per dollar -- since mid-2008, a policy that has kept prices of Chinese exports to the U.S. down as China’s economy has continued to boom.

That has brought howls from U.S. manufacturers and many in Congress. They say China is unfairly managing its currency to maintain an export edge at a time when the country should be encouraging more domestic consumption to help offset weak demand in much of the developed world.

The need for a global economic “rebalancing” is expected to be a key topic of the summit of G-20 nations’ leaders in Toronto beginning Saturday. So China’s move obviously was politically calculated.

In a statement over the weekend, the People’s Bank of China said it had decided to “enhance” the exchange-rate flexibility of the country’s currency, citing what it called an improving world economy.

“The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the bank said. “It is desirable to proceed further with reform of the exchange rate regime and increase the [yuan] exchange rate flexibility.”

In trading Monday the yuan rose 0.2% to 6.813 per dollar. That doesn’t look like much but it was the biggest one-day move in 18 months, according to Bloomberg News data.

China’s policy shift could dampen fears about deflationary forces at work in the global economy -- in particular, Europe’s government-debt crisis and the austerity measures that that has forced on Greece, Spain, Portugal and other countries.

Tony Crescenzi, a portfolio strategist at bond fund giant Pimco in Newport Beach, said that China’s move was “reflationary because it will enable China to purchase a larger amount of goods from other countries and because it speeds the journey toward fixing the major imbalance that exists in the world today: excess demand in developed nations and excess savings in emerging countries.”

For the moment, markets like what they see. Prices of key commodities including copper, oil and corn rallied overnight. Along with the yuan, Asian currencies including the Singapore dollar and South Korean won rose against the U.S. dollar.

The euro also extended its recent rebound against the greenback, climbing above $1.24 for the first time in a month, to $1.247 from $1.239 on Friday.

One possible near-term loser from China’s change of heart: the U.S. Treasury bond market. Some investors may sell Treasuries if they become more optimistic about a rebound in share prices worldwide on growth hopes. Expectations that a rising yuan could dent China’s exports -- slowing the growth of the country’s foreign-exchange reserves -- also could drive investors out of Treasuries if they assume China will be buying fewer U.S. bonds.

Bond market players “have been looking for a reason that would halt the recent rally [in Treasuries], and this news could be what restrains and potentially stops the rally for now,” analysts at Nomura Securities International said in a report on Sunday.

In overnight trading the 10-year Treasury note yield edged up to 3.28% from 3.22% on Friday.

-- Tom Petruno