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Yuan revaluation to impact region

MARKET WATCHERS have mixed opinions as to whether last week’s sudden revaluation of the Chinese yuan will impact prices across the region.

MARKET WATCHERS have mixed opinions as to whether last week’s sudden revaluation of the Chinese yuan will impact prices across the region.

The People’s Bank of China revalued the yuan by 2.1% against the US dollar on July 21. The move had been anticipated for some time, but its timing caught many observers by surprise.

The revaluation has left the yuan trading at about 8.11 against the US dollar. China had previously kept the yuan pegged at 8.28 per US dollar. Following the adjustment, Beijing has allowed the yuan to float within a narrow 0.15% band either side of a level set by a basket of currencies.

“We expect it will have some inflationary effect,” Walid Shahabi, head of research at Shuaa Capital in Dubai, told Arabian Business. “A large amount of imports into the region — either final products or some industrial products — are Chinese,” he adds.

China has been under pressure to let the yuan appreciate by the US and the European Union. Both have previously complained that the undervalued yuan made Chinese goods unrealistically cheap, thereby damaging there own domestic economies.

Chinese exports make up about 11% of total imports into the UAE and about 8% of total imports into Saudi Arabia.

Shahabi added that the move could also have an indirect effect on oil prices, which are hovering around the US$60 a barrel mark. “If [the revaluation] slows export volumes from China, it’s going to have a negative effect on Chinese growth, which would have a negative effect on demand for oil,” he explained.

However, Rahul Badhwar, regional head of sales at HSBC, said the overall impact of the revaluation would be negligible. “The cost of production [in mainland China] is ridiculously low, so I’m not sure [a rise of] 2% makes much of a difference,” he said.

Muhammad Younas Malick, a senior economist at National Commercial Bank (NCB), said it was difficult to determine the overall impact of the revaluation without knowing the breakdown of the range of currencies that the yuan is now tied to.

“The basket will be proportioned according to the trade relationship China has with different countries in the world,” he said.

Saudi Arabia makes up only 0.6% of China’s total exports, and would therefore not have a significant impact on the kingdom, according to the NCB’s Malick.

But as David Wilder, a Beijing-based analyst for MNI, a US market information service, told Arabian Business: “If [Beijing] said what was in the basket, people would be able to work out how much of each different currency they would need to manage and defend the exchange rate and they would then be able to go and trade accordingly.”

The People’s Bank of China is using a basket of currencies to decide the value of the yuan, but is not letting on exactly how they arrived at this determination.

“In theory it means that they’ll adjust the valuation based on market demand and supply for the euro, yen, dollar etc. In practice, it means that US$1 will buy as many yuan as the People’s Bank wants it to. However, it can only move 0.3% around a mid-point — set each day by the People’s Bank of China — so it technically can’t move more than 1.5% in either direction in any given week,” commented Wilder.

A fortnight ago China reported a June trade surplus of US$9.7 billion, its highest monthly figure this year, as its exports leapt at an annual rate of more than 30%. The surplus for the first half of this year, at US$39 billion, is already larger than the US$32.8 billion that it notched up for the whole of last year. Goldman Sachs have predicted a full-year surplus of more than US$69 billion — close to 4% of China’s GDP.

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