Powered by Blogger.

Revaluation Of RMB Did Not Benefit Much To China

This weekend, the PBOC announced more reforms to China’s exchange rate regime. While the market has been talking about a possible revaluation of the renmimbi (RMB) for some time, there has been little action from China so far. Point estimates of the RMB's current undervaluation ranges from zero to 30%. The impact on commodities is unlikely to be straightforward, and should depend on how China goes about revaluing the RMB. However, they ware three scenarios:

  1. China reinstates the crawling peg system, as before the financial crisis. If this happens, the initial impact should be limited, as currency moves should also be very limited. However, a crawling peg system where the RMB appreciates slowly over time may actually see more money flowing into China, as the market anticipates currency appreciation. More money into China could see their foreign reserves build even more, amplifying global liquidity that is concentrated in China’s global reserves. This should favour the longer-term prospects of gold (but also most other commodities in general), given gold’s close relationship with global liquidity and the continued accumulation of liquidity. It would also make RMB-denominated commodity prices cheaper than what it would have been if the RMB was pegged against the dollar. At the margin, it could benefit commodity demand from China.
  2. China makes a one-off, large revaluation, of say 15% to the RMB. The immediate impact could see a rise in demand for commodities from China — simply because all dollar-denominated commodities would suddenly be 15% cheaper for China. This should favour commodities with large exposure to China, e.g. copper. However, a significantly stronger currency means tighter monetary conditions and over a couple of months a stronger currency may start weighing on China’s trade balance. China is likely to import more final goods and export less. With a smaller trade balance (or even a negative one) there could be lower GDP growth and less demand for commodities. This may be the case in particular if spending emphasis shifts from government’s capital expenditure to consumer final consumption expenditure.
  3. China goes for a full-blown floating currency. Should this happen, and say the RMB is currently undervalued by 20% the initial effect may be similar to Scenario 2. The difference would be that China's growth in reserves may end suddenly. A stronger currency should see a knock-on effect on the Chinese trade balance. Their foreign reserves will not disappear but the massive rise in reserves every month could slow substantially if the currency appreciates by a great margin. Furthermore, their dollar denominated foreign reserves becomes less in RMB which could even slow government spending. After a few quarters, demand for commodities from China may slow as growth tapers down.

I believe Scenario 1 should be China’s preferred option. China have try hard to not revalue RMB sure they know the effect on China economic. The delay sure because revaluation of RMB did not benefit much to China.


Share Journey June 22, 2010 at 10:10 AM  

Mach -> Much

Durian Edge June 22, 2010 at 11:30 AM  

Hi Share Journey,

Thanks for the correction. I review the post already.


Related Posts Plugin for WordPress, Blogger...


My Blog List

Blog I Follow

Popular posts

Blog Archive


Stock Quote

Stock Quotes
KLCI Live Quotes
Lookup Stock Code/Name
Enter Stock Code/Name

Powered by zoomFinanceCorp.

Subscribe Now: Feed Icon

Home Page Home Page Home Page Home Page Home Page Home Page

Investment Idea

My investment with RM5,000 initial capital have been growing since 2005.I found the stock market appears confusing and complicated, but it is most definitely based on logic "supply and demand". However, the laws of supply and demand as observed in the markets do not behave as one would expect. To be an effective trader, there is a great need to understand how supply and demand can be interpreted under different market conditions and how to take advantage of this Off Market Transactions in KLSE.

Malaysia Gold Price

Gold Price Per Gram in Ringgits
Malaysian Ringgits per Gram

  © Free Blogger Templates 'Greenery' by Ourblogtemplates.com 2008

Back to TOP