Flexibility of the yuan could mar competitiveness of petrochem makers in China

22-Jun-10

Petrochemical producers in China could become less competitive in global markets as the yuan strengthens. As per ICIS news, the country’s recent moves to enhance the yuan’s flexibility and further reform its currency regime could mar competitiveness of export-dependent domestic players. However, the Chinese refiners would be largely benefited by the stronger yuan as they import majority of their crude oil. However, these reforms, thought to hurt export-dependent industries in the short run, will benefit the country in the long run, reduce risk of a dramatic escalation of trade tensions between China and the US, constrain inflation and asset bubbles in China, and facilitate transition of the Chinese economy from export-led to a consumption-driven one. 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.