FocusStronger yuan could hurt Chinese petchems competitiveness

21 June 2010 06:36  [Source: ICIS news]

By Fanny Zhang

GUANGZHOU (ICIS news)--Petrochemical producers in China may see their price competitiveness eroded by the country’s recent moves to enhance the yuan’s flexibility and further reform its currency regime, analysts said on Monday.

Domestic petrochemicals could become less competitive in international markets when the yuan strengthens, said Qiu Xiaofeng, an analyst at Shanghai-based brokerage house China Merchant Securities.

“Many of our petrochemical products are already uncompetitive in terms of price and quality compared with those from the developed nations. So, with yuan further appreciating, our petrochemical exports would worsen,” Qiu said.

However, Qui added: “Chinese refiners would be the biggest beneficiaries of stronger yuan as they are importing the majority of their crude oil from overseas.”

Other analysts said that while the currency reforms could hurt export-dependent industries such as textiles and cement, the reforms would benefit the country in the long run.

“The yuan reform will help reduce the risk of a dramatic escalation of trade tensions between China and the US in the coming months and decrease the global imbalance over the longer run, and at the same time, facilitate the transition of the economy from export-led to a consumption-driven one,” said Jun Ma, chief economist at Hong Kong-based Deutsche Bank.

The US has repeatedly called on China to allow its currency to strengthen.

Analysts said that the currency reform would also help to constrain inflation and asset bubbles in China.

The analysts' comments followed the People’s Bank of China's (PBC's) announcement over the weekend that it would proceed with reforms of the yuan’s exchange rate mechanism.

"In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments situation in China, the People's Bank of China has decided to proceed further with reform of the RMB [yuan] exchange rate regime and to enhance the RMB exchange rate flexibility," the PBC said in a statement.

Although China reformed its currency regime in July 2005 by allowing the yuan to float with a basket of currencies, the yuan has essentially been pegged to the dollar since 2008. The latest announcement meant that the yuan would be allowed to gradually appreciate against the dollar, according to analysts.

“We expect that the yuan would appreciate by 3-5% against the dollar this year,” said Wei Tao, an analyst at Shenzhen-based brokerage house Guotai Junan Securities (GTJA).

"In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed on reflecting market supply and demand with reference to a basket of currencies," the PBC said in the statement.

($1 = CNY6.83)

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By: Fanny Zhang
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