How the Chinese Government Will Increase Your Gas Bill

On Friday, The Economic Times reported that China is planning to weaken its control over the yuan, working to make it convertible within the next five years. Until now, the Chinese have kept a tight grip on the yuan--requiring governmental approval for those who wish to convert the currency. This control of the yuan may have had the effect of causing the Chinese currency to maintain its value, when it should have been appreciating. Many economic commentators have accused the Chinese government of engaging in currency manipulation, but so far the U.S. government has been reluctant to give the Chinese that label. If the yuan is being held under fair-value, then the removal of conversion controls might cause the yuan to significantly appreciate. Why are the Chinese considering the move? Well, it may be due to the fact that the citizens of China are currently experiencing significant food inflation. If the Chinese currency appreciates, then the purchasing power of Chinese citizens may increase, reducing the level of inflation in the Asian economy. How will the dollar fair in all this? If the Chinese currency appreciates, it might cause the dollar to depreciate, as the yuan gains purchasing power at the expense of the U.S. dollar. That would mean that commodities like oil and gold may become more expensive to consumers with dollars. Also, Chinese imports might look more expensive to consumers in the United States. That presents many interesting opportunities to investors. Investors might consider a play on oil and gold. United States Oil Fund USO and SPDR Gold Trust GLD may offer investors an opportunity to profit from a rally in commodities. Traders could also consider a short play on U.S. corporations that rely on Chinese imports such as Wal-Mart WMT. Alternatively, investors might look for a straight yuan play. There are several ETFs which may allow investors to do just that.