Singapore: Beijing’s moves to control inflation and trim its trade surplus by allowing the yuan to strengthen could boost China’s commodity imports and lift global prices, but would likely have little impact on domestic prices.
China is one of the top consumers of many commodities including oil, iron ore, copper and soy, and a rise in the Middle Kingdom’s purchasing power would allow it to import more for the same amount of yuan – if international prices are stable.
A fillip to rapidly rising Chinese demand for a range of commodities would potentially undermine the inflation-busting impact of the yuan move. The strain of supplying raw materials for an expanding economy in the world’s most populous nation has already contributed to multi-year highs across the asset class.
“The appreciation of the yuan is going to increase the purchasing power of people in China, which means they will consume more of everything,” said Ker Chung Yang, an analyst at Phillip Futures in Singapore.
China, which let the yuan rise 3.6 per cent in 2010, is expected to allow the currency to rise about 5.4 per cent against the dollar in 2011 to combat inflation, a Reuters poll shows.
The relative value of the dollar and the yuan has fuelled tension between the US and China, and was likely to feature when President Barack Obama meets President Hu Jintao at the White House on 19 January. Obama may ask Beijing to let the yuan appreciate further, as he seeks to cut US unemployment by lifting exports to China.
In markets where China is heavily dependent on imported supplies, a stronger yuan may help temper rising domestic prices. In the case of aluminium, where the nation has excess capacity, purchasing power will have little impact, but a stronger yuan would make Chinese exports more costly.
“I can’t see how revaluation can be anything but bullish, unless the increase is so great it crimps growth, and we expect a modest, progressive rise,” said Alan Heap, Commodities Analyst at Citigroup in Sydney.
“Copper and iron ore will be the winners; aluminium is the loser at the other end of the spectrum.”
A stronger yuan should lower import costs for manufacturers relying on external supplies, which in turn could boost their profit margins and fuel further demand.
“We believe continued appreciation in the renminbi could lead to lower input costs throughout the Chinese industrial complex, potentially expanding margins and acting as a positive for commodity imports and freight rates,” said Michael Webber, shipping analyst for Wells Fargo Securities.
Copper and soy markets have already seen the benefit of the rising yuan, moving step by step with the currency since June. In aluminium and oil markets, which are dominated by demand from the United States, the lines diverge.
China consumed over 7.5 million tonnes of copper in 2010, according to Reuters calculations, almost 40 per cent of the world’s refined output. It mined just one million tonnes of the metal versus the 18.5 million tonnes extracted from the earth in 2010.
Anticipation outpaces appreciation
Commodities markets are so sensitive to changes in demand from the world’s most populous nation that any sign of increased buying can trigger bull runs.
So the inflation-busting impact of a stronger yuan may well get washed aside as investors stay ahead of the rising currency.
In June last year, when China announced plans to let the yuan float more freely, commodity prices jumped by as much as five per cent in a single day in response to the news, more than wiping out the currency advantage gained over the following six months in a single session.
“Last year, at the end of June they decided to raise yuan and we saw a spike in soybean and crude palm oil prices,” Yang said.
China spent $294.54 billion on oil, iron ore, soy, copper and rubber in 2010, versus $192.77 billion in 2009. Some of that rise was due to the higher volume of imports, but some of it was due to rising international prices.
The volume of unwrought copper was about the same in the two years, but the value of those imports rose 44 percent in 2010 to $32.74 billion. In the same period, London Metal Exchange copper prices rose 30 percent.
“Sellers into China are always going to be ahead of the strengthening yuan,” a trading source at an international bank in Singapore said.
“China is addicted to foreign commodities and the traders know Beijing can’t go cold turkey on all that imported iron ore or soy and still continue to grow. It’s a sellers’ market so prices will rise in dollar terms, negating any currency benefit.”