Over the weekend, China announced a change in monetary policy, from maintaining a fixed exchange rate to the dollar at 6.82 yuan to a policy that allows the yuan to appreciate against the dollar. Estimates of appreciation in 2010 range between 3-5% and more in subsequent years.
As the yuan strengthens against the dollar, Chinese purchasing power of dollar-denominated goods will rise, improving the competitiveness of U.S. goods and services in China. It is hoped that this will preserve and increase jobs in the U.S.
A stronger yuan raises the prices of Chinese imports into the U.S., which should reduce demand. More exports to and fewer imports from China, if this scenario materializes, will reduce the large trade imbalance in China’s favor.