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News Tip: China's Action a 'Warmup' for Floating the Yuan This Fall, Professor Says

"The 2 percent revaluation is no big deal because cheap Chinese imported goods will remain cheap after the revaluation," says Campbell Harvey

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.