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News Tip: China’s action a ‘warmup’ for a floating of the Yuan this fall, Duke finance scholar says

Note to reporters: Campbell Harvey can be reached for additional comment at (919) 660-7768 or (919) 271-8156.

July 21, 2005

China’s announcement Thursday that it will no longer tie the value of its yuan to the U.S. dollar is just a “warmup” for a floating of the yuan this fall, a Duke University finance scholar says.

“I consider today’s announcement to be an intermediate step -- a warmup,” said professor Campbell Harvey, a finance faculty member at Duke’s Fuqua School of Business. “The big event will come in the fall when I expect they will float the yuan.

“The 2 percent revaluation is no big deal because cheap Chinese imported goods will remain cheap after the revaluation,” he said. “I don’t even expect the 2 percent will be passed along to U.S. consumers. Many Chinese exporters will eat part of the 2 percent by reducing their prices slightly, and Wal-Mart will eat the rest resulting in slightly lower profitability.”

Harvey said a more substantial revaluation would have reduced the demand for U.S. Treasury bonds, pushing their yields up.

“Higher longer-term yields would have taken some pressure off the Fed and the housing market. The Fed has increased the short-rate nine times and has seen, to its frustration, the long-term rates fall. While I expect some upward pressure on rates, today’s 2.1 percent will not substantially impact rates,” Harvey said.

Harvey said last month’s Duke/CFO Magazine Global Business Outlook Survey showed that CFOs do not believe the revaluation of the yuan would help U.S. firms to a significant degree. About 15 percent of the firms surveyed said they would be helped by the Chinese move, while 11 percent said it would hurt.

“It’s a wash,” said Harvey.

Among Asian CFOs, 30 percent said a revaluation would hurt their firms, and 24 percent said it would help.
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