Muddled Messages Over Yuan Revaluation


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By John Richardson

Confusing messages continue to emerge from Beijing over whether a revaluation of the Yuan is imminent, a debate that has major implications for the chemicals industry.

The Financial Times reported this morning that senior government economist Ba Shusong had said that China could widen the currency’s daily trading band and allow it to resume its gradual appreciation that was halted in July 2008 due to the credit crisis.

But Bloomberg quoted Jiang Yu, spokeswoman for China’s foreign ministry, yesterday as saying that a rise in the value of the Yuan would not help correct China’s trade imbalance with the US. This perhaps suggests that the Chinese government will argue the case for no revaluation during important meetings in Washington later this month.

Nevertheless, the same article quotes Stephen Roach – Morgan Stanley Asia chairman – as predicting that a US decision to delay a verdict on whether or not Beijing is a “currency manipulator” has eased tensions and made it more likely that a managed float will be resumed. The Treasury’s verdict had been due on 15 April.

As we pointed out in late March and yesterday, the irony of the extraordinary rise in exports to China of chemicals and plastics during 2009 was that these volumes probably helped to further undermine the domestic consumption base of the US and European exporters. A lot of the increased volumes went into filling the inventories of new partly export-focused manufacturing plants built as a result of China’s huge economic stimulus.

If the value of the Yuan does rise then how hard will some of these new manufacturing plants run – particularly the ones making low-value products where the current currency advantage is crucial for maintaining thin margins?

If their operating rates are forced lower as these factories lose competitive advantage, this might contribute to lower chemicals and plastics import volumes.

But the bigger deal for the chemicals industry would be an easing of trade tensions between the US and China, thanks to the resumption of a manged float and a clear policy for gradual appreciation. Increased trade tensions and resulting sanctions could otherwise severely damage the fragile and uncertain economic recovery.

US chemicals producers might also benefit if their local customers enjoy an improved competitive position as a result of a stronger Yuan.

But this will only occur if other lower-cost manufacturers don’t step in to gain any market share lost by the Chinese!

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