Tickers in this Article: AA, BHP, WMT, TGT, FCX, X
This past weekend, Chinese officials announced a move that had been called & hoped for by just about everyone not living in China, stating that they would allow more flexibility in the Chinese yuan (or renminbi) to appreciate versus the U.S. dollar, to which it has been pegged and unchanged for several years. The statement caused a collective - if small - sigh of relief by global producers of aluminum, steel, coal and other raw materials that sell to China but have a hard time competing with domestic firms due to the "shadow tariff" caused by the yuan's low value.

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These global producers echo the view of many analysts - that China keeps the yuan much lower than its "natural" worth in order to boost the value its exports. Exports still make up the lion's share of China's GDP.

Winners & Losers from the Change
Commodity stocks jumped on the news Monday, highlighted by the metals producers. Alcoa (NYSE:AA) shares were up 5.5%, while U.S. Steel (NYSE:X) rose 3.59%. Mining and materials stocks also responded, as Freeport-McMoRan (NYSE:FCX) rose 3.3% and BHP Billiton (NYSE:BHP) ticked up 2.3%. It was a nice shot in the arm for these industries, which have underperformed the S&P 500 in 2010 after having a stellar run to close out 2009.

On the flip side of this boost to companies that sell into China, retailers that buy a lot of Chinese exports saw their stocks fall. Companies like Wal-Mart (NYSE: WMT) and Target Corporation (NYSE:TGT) now have to spend more dollars for items exported out of China; shares in both companies were down over 1% Monday.

Currency Specifics
While yuan currency trading reflected the new value on Monday, on Tuesday morning the official step was taken to change the reference rate for the yuan to 6.7980 per $1 from the old rate of 6.8275.

It was a modest move - just 0.42% versus the dollar - yet it was the largest single day swing in five years, a sign of just how slow China has been to exercise currency "flexibility". (For more, see Why China's Currency Tangos With The USD.)

Despite fierce international pressure to further appreciate the yuan, and faster, China has no intention of going by anyone's timetable other than their own. In their defense, they do have a tightrope to walk: a plummeting euro is hurting exports to their largest trading partner, while at home there is unrest over wages and an uneven domestic economy.

The Bottom Line
The short term boost to raw materials stocks is to be expected as a reflection of the better terms these firms will get when competing against domestic Chinese producers. But don't expect Monday's move to kick off a sector rally all on its own. The strength of the metals, mining and energy firms will still be driven by the duration and depth of any global economic recovery, and the market prices of the commodities themselves. But the yuan move is a modest step of good faith by China, and may help to avert an all-out trade war in the months and quarters to come. (For related reading, check out Investing In China.)

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