Analysis: More flexible yuan mildly bullish for commodities
By Lisa Shumaker
CHICAGO (Reuters) – China’s move to make its yuan currency more flexible should be mildly bullish for many commodities, boosting China’s purchasing power and possibly increasing its imports of copper, iron ore and chicken.
Although China made clear on Saturday that a one-off step change in the rate similar to 2005 wasn’t in the cards, analysts expect the yuan to slowly rise, adding to its nearly 20 percent gain since its last revaluation in 2005.
“Should be a positive, as it was in prior years,” said Fred Demler, head of commodities for MF Global.
China’s huge appetite for raw materials has been one of the main drivers of commodity prices in recent years. China is the world’s second largest consumer of oil, using one in every 10 barrels produced. China is also the top consumer of iron ore, copper and aluminum.
When China raised its exchange rate in 2005, by 2.1 percent, commodities rallied for more than a year after the revaluation, although not solely because of Beijing’s move.
Copper prices steadily climbed and eventually more than doubled to what was then a record high of $8,790 a metric tone in 2006.
The Reuters-Jefferies CRB index .CRB of 19 commodities rallied 10 percent in the six weeks after China ended its decade-long peg in July 2005. Crude oil rose more than 20 percent, or $12 a barrel, in that period.
Because China will not institute a rapid change in the yuan’s value as it did in 2005, any commodities rally is likely to be more muted and affected by whether signs of economic recovery around the globe continue.
“I think we will see an initial pop (in crude prices) but I think it is going to be a short lived,” said Phil Flynn, an analyst with PFGBest Research in Chicago. Crude prices could initially move up to $83 a barrel from Friday’s close of $77 on the news before easing lower again, he added.
In what was seen as a largely political move to deflect criticism of its fixed exchange rate ahead of the G20 meeting next week, the central bank indicated it was ready to break a 23-month-old dollar peg that has come under intense criticism from the United States and other countries.
Even a small rise in the yuan could shave billions off the cost while raising the volume of China’s commodity purchases.
Last year, China spent $89 billion on oil imports, $50 billion on iron ore and $29 billion on copper. A 3 percent increase in the yuan could save Beijing $5 billion on just those materials.
U.S. MEAT EXPORTS MAY RISE
“China’s economy is experiencing explosive growth and Beijing has taken several key measures in recent years to curb that robust growth.
“Allowing the yuan to be more flexible is simply another calculated measure to achieving that goal,” said Adam Sarhan, founder and chief executive of New York’s Sarhan Capital.
In addition to stronger demand for crude oil and metals, China may import more U.S. meat and livestock feed — assuming trade disputes over pork and chicken can be resolved.
Following the July 2005 revaluation of the yuan, U.S. pork exports to China rose 14 percent in the third quarter of 2005 from a year earlier and 23 percent in the fourth quarter, according to U.S. Agriculture Department data.
Chicken exports rose 75 percent in the third quarter of 2005 versus 2003 and 84 percent in the fourth quarter. Chicken exports to China were unusually low in 2004.
“In the longer term, this will be supportive to U.S. exports, including meat and poultry,” said Jim Robb, an economist at Livestock Marketing Information Center. “But we have these short-term issues so it’s not an immediate boost.”
(Additional reporting by Bob Burgdorfer and Christine Stebbins in Chicago, Matt Robinson and Barani Krishnan in New York; editing by Jonathan Leff and Todd Eastham)
China forex move could thwart U.S. hopes – Roubini
By Walden Siew
NEW YORK, June 19 (Reuters) – China’s decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street’s most closely followed economists, said on Saturday.
China said on Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.
“This is the first significant signal in years of a change in Chinese currency policy,” Roubini, best known for having predicted the U.S. housing meltdown, told Reuters.
But it remains to be seen how China would put the new system into practice including the composition of a basket of currencies that Beijing will use as a reference point for the yuan — also known as the renminbi — and the base date for that basket, he said in an e-mail.
“Since they have not changed the previous range for the band — plus or minus 0.5 percent — most likely on Monday China will allow the renminbi vs U.S. dollar to move,” said Roubini.
The yuan has risen sharply in recent months against the euro, which sank over Europe’s debt problems, so a stronger yuan could not be taken for granted, he said.
If the euro were to continue to depreciate, “the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome,” Roubini said.
His comments echoed those of an adviser to China’s central bank on Saturday.
Li Daokui, an academic adviser to the monetary policy committee of the People’s Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the U.S. currency.
Roubini, like other analysts, said a major strengthening of the yuan looked unlikely.
“Even if the Chinese were to allow a gradual renminbi appreciation relative to the U.S. dollar, the size of such appreciation would be modest over the next year, not more than 3 or 4 percent as the trade surplus has shrunk, growth is likely to slow down on China and labor/employment unrest remains of concern to the Chinese.”
Roach, O’Neill Say China Yuan Move Shows Confidence in Recovery
By Gopal Ratnam and Timothy R. Homan
June 19 (Bloomberg) — China’s decision to allow a more flexible yuan shows the country’s leaders are convinced the world economic rebound is durable, said economists Stephen Roach and Jim O’Neill.
“This move is a vote of confidence in the global recovery,” Roach, Chairman of Morgan Stanley Asia Ltd. said in an e-mail. “Markets are going to like” the decision, said Jim O’Neill, chief global economist for Goldman Sachs Group Inc.
China’s central bank said the decision to “increase the renminbi’s exchange-rate flexibility” was made after the world’s third-largest economy improved. Chinese authorities had prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.
The announcement may help restore investor confidence shaken by the European debt crisis, O’Neill said in an interview in St. Petersburg, Russia.
“It could be that China is doing its bit to rescue the world markets,” he said. “It may allow for attention to be diverted from the obsession with the European monetary union and the sovereign currencies in Europe.”
China’s decision, a week before Group of 20 leaders meet in Toronto to consider ways to safeguard the economic recovery, may deflect criticism that its undervalued currency has added to lopsided global flows of trade and investment. The announcement signals an end to the currency’s two-year-old peg to the dollar.
‘Not a Panacea’
Even so, Roach said the shift “is not a panacea for an unbalanced global economy.” Countries such as China with trade surpluses will have to take steps to stimulate private demand, he said, while countries such as the U.S. “need to show a credible commitment to fiscal consolidation and take actions that would boost personal saving.”
The People’s Bank of China ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. The yuan is a denomination of China’s currency, the renminbi.
The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen.
China’s announcement could be seen as a signal that the “worst of the financial crisis is over, China is growing very strongly, that this is an auspicious time to go back to the policy that had initially been announced,” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview with Bloomberg News.
Lardy said it’s unclear how much the currency will be allowed to strengthen.
“I think if they had in mind some indication of a specific amount, they might have announced that today. I would not anticipate a second announcement; the markets are just going to see.”
O’Neill predicted the yuan will appreciate 1 percent when markets open June 21 and predicts a 5 percent appreciation by year’s end.
Chinese exports have helped drive growth in the world’s third-largest economy.
China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years.
“The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world,” O’Neill said.
It remains to be seen if China’s decision is a “symbolic move or a true shift in China’s currency policy that will result in significant currency appreciation,” Eswar Prasad, a senior fellow at the Brookings Institution in Washington and a former IMF economist, said in an e-mail.
Still, “this move signifies recognition by Chinese officials that a more flexible exchange rate is in China’s own interest,” Prasad said.
Changes in China’s exchange rate may not have an impact on the bilateral trade balance, John Frisbie, president of the U.S. China Business Council said in an e-mail.
“Much of what we import from China is stuff that we imported from elsewhere before,” Frisbie said. “If we didn’t import it from China, we’d likely just import it from somewhere else.”
China Signals End to Yuan’s Two-Year Peg to Dollar (Update1)
By Bloomberg News
June 20 (Bloomberg) — China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit.
The decision was made after the world’s third-largest economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged.
“The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”
The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner’s policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.
“This is another small victory for Tim Geithner,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said in an interview with Bloomberg Television in St. Petersburg, Russia.
“It makes it a lot more difficult for Washington and Congress to do China bashing,” O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”
Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said.
China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.
“It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Prasad, a former head of the China division at the International Monetary Fund. The move “also serves to acknowledge that they have an important responsibility to the international community.”
Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.
The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi.
“This move is a vote of confidence in the global recovery and a reaffirmation of Beijing’s longstanding commitment to a flexible currency regime,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an e-mail. “This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.”
Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March.
A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said in a report last week.
China’s inflation rate jumped to a 19-month high of 3.1 percent in May, higher than the government’s full-year target of 3 percent. Central-bank dollar buying has left the nation with $2.4 trillion in currency reserves, the world’s largest holding.
“China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui, an adviser on the People’s Bank of China’s policy board, said in an interview. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.”
Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation.
“The central bank’s statement means China’s exit from the dollar peg,” said Zhao Qingming, an analyst in Beijing at China Construction Bank, the nation’s second-biggest bank by market value. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.”
Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which might have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings.
China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years.
China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of its statement. The Chinese version said no “large-scale volatility.”
Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.
“Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.
“China has to offer something ahead of the G-20,” he said. “Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.”