Yuan revaluation may see markets reacting
Any step taken by China over yuan revaluation would see a knee jerk reaction in the markets. Asian currencies would also strengthen on yuan revaluation, as some of the competitive pressure would subside.
2005-05-25 14:59
Speculation over yuan revaluation or relaxation of tight trading range around 8.27 yuan/USD has been high for the last month or more. There have been some false alarms on this earlier too, but this time around it looks like it just might happen, if not immediately then in phases as China reforms its banking sector.
Exchange rates form an important part of the fundamental study on commodities, as any change in exchange rates can affect demand and supply of that particular commodity. For example, if yuan appreciates, it would make exports less lucrative, as an exporter would not get attractive returns.
This could also mean declining industrial production leading to employment problems. China? exports have been viewed unfairly cheap by other exporting countries, including India. The US trade imbalance with China has almost doubled in the last three years. In case of textiles and clothing, US imports from China are up by 100? of percent year-on-year.
China? National Bureau of Statistics has suggested that yuan appreciation of 5-6% could limit export growth in 2005 by 10%. Lower export growth could be negative for commodity prices. China for a long time has had a steady yuan to keep Chinese exports from losing competitiveness in global markets.
But then we might see more demand from Chinese consumers for dollar denominated commodities, as they would be more affordable. A revaluation would take China away from more export growth to domestic spending and better standard of living, thus favouring consumption.
Besides this, Asian currencies would also strengthen on yuan revaluation, as some of the competitive pressure would subside. Some strength could rub onto Canadian dollar and euro also, as the revaluation could put some upward pressure on US inflation rates.
But since it is China we are talking about, any step taken by them would definitely see a knee jerk reaction in the markets and would be felt across the entire economy as and when that happens.
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