FocusStronger China yuan to benefit local petchem industry

16 March 2010 05:56  [Source: ICIS news]

By Pearl Bantillo and Fanny Zhang

SINGAPORE (ICIS news)--China can import more volumes of petrochemical raw materials at less cost if it were to abandon the quasi-peg of the yuan to the US dollar and allow the Chinese currency to appreciate, analysts and industry sources said on Tuesday.

But no amount of international pressure could force the Chinese authorities to embrace a freer exchange rate policy, as Premier Wen Jiabao made clear over the weekend, they said.

The US, the world’s biggest economy, just stepped up its ante on calling for the appreciation of the yuan, which at current levels, was deemed to be giving China undue advantage in terms of exports.

China ranks as the third biggest economy in the world and is an all-important end-market for petrochemicals in Asia.

“The petrochemical industry itself would welcome the yuan appreciation but export-driven industries would be hit hard,” said an executive at China Huahai Oil, a stated-owned company engaged in oil and petrochemical trading.

The country is a net importer of crude oil and raw chemicals, with import quantities continuously growing along with rising demand, analysts said.

China imported 204m tonnes of crude oil in 2009, representing 52% of its total consumption in the year, based on official data.

Its imports of acrylonitrile-butadiene-styrene (ABS) resins reached 2.16m tonnes last year, up 11% from 2008. China took in 249,671 tonnes polyester chips and 3.18m tonnes of rubber last year.

The yuan-dollar was at CNY6.8263 on Tuesday, barely moving since the start of the year, based on data from the People’s Bank of China (PBoC).

In 2009, the Chinese currency slipped 0.06% against the dollar after a 7.05% jump in 2008 and a 6.86% gain in 2007, based on data from Market News International (MNI).

A stronger yuan would reduce the cost of production for companies that rely on imports for raw materials, analysts said.

“This is obviously a cushion to inflation,” said Liu Qiyuan, chief economist at Shenzhen-based China Merchants Securities.

But that would just be one part of the story. China’s rapid economic expansion has been closely linked to exports – a source of vulnerability when the global financial and economic crisis struck.

The petrochemical raw materials that it imports are used to manufacture end-products meant to be shipped out.

Like most of its Asian neighbours, China would not want a very strong currency to impede growth in this important economic engine at a time when global economic recovery is still very fragile.

“China will not let the yuan appreciate given the unclear and unstable recovery in the short term,” Arden Dai, an analyst from a global consultancy firm Frost&Sullivan Shanghai said.

A stronger yuan would make China’s exports more expensive and it could lose out markets to countries with more competitively priced products.

At most, the China may allow a gradual appreciation of the yuan – a 3-5% gains against the US dollar, and there would be no significant change in its foreign exchange policy, analysts said.

“China is really is one economic power and will not bow to pressure,” said Vishnu Viswarathan, Singapore-based economist at consultancy firm Forecast.

The second half of the year may see a slightly stronger yuan as China mulls the adoption of a better management system for its exchange rate, which could be patterned after Singapore, Viswarathan said.

The Singapore dollar’s value is pegged against a trade-weighted basket of currencies.

“It [China’s foreign exchange policy change] would depend largely on our own economic situation rather than noises from other countries. And as Premier Wen mentioned days ago, we reject any intervention from other countries on our exchange policy,” said Qiu at China Merchant Securities.

“The government has to ensure a smooth transition … It takes a long time to change an economy from an export-driven one to a domestic demand-driven one,” Qiu added.

With additional reporting by Judith Wang

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By: Pearl Bantillo
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