Stronger Chinese yuan could benefit domestic petrochem industry

17-Mar-10

China can import more volumes of petrochemical raw materials at less cost if it were to abandon pegging the yuan to the US dollar and allow the Chinese currency to appreciate, as per ICIS. This will however, affect the export-driven industries. However, the Chinese Premier has clarified that no amount of international pressure could force the Chinese authorities to embrace a freer exchange rate policy. USA has recently called for the appreciation of the yuan, which at current levels was deemed to be giving China undue advantage in terms of exports. China is a net importer of crude oil and raw chemicals, with import quantities growing along with rising demand. China imported 204 mln tons of crude oil in 2009, representing 52% of its total consumption in the year, based on official data. 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). As a stronger yuan would reduce the cost of production for companies that rely on imports for raw materials, it will be a cushion to inflation. However, since China’s rapid economic expansion has been closely linked to exports, 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. 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, 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. H2-2010 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 dollar whose value is pegged against a trade-weighted basket of currencies.