China Currency (and Prices) Set to Rise in 2008

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Just days after making our metals and currency predictions for 2008 I read that many notable commentators are supporting our comments on the Chinese currency. Driven by stubbornly high inflation, Beijing looks set (unofficially) to let the RMB appreciate significantly in the coming year in an attempt to dampen exports and reduce demand for imports, hoping this will cool the economy. With inflation running at 11.5% last year driven by growing exports and China’s foreign currency reserves just shy of $1,500B the government is desperate to bring growth back into single figures. Our call was from 7.3 to 6.7 over the year but Stephen Green of Standard Chartered Bank is predicting the RMB could rise to 6.17 per USD by year end. The effect for importers of Chinese product could be a 9% increase in prices on top of recent changes in export taxes export taxes and VAT rebates.

We have long said that China’s role as the low cost country of first choice is on a slow decline and for many commodities this is increasingly becoming reality. A weakening US dollar and rising efficiencies have made many US companies competitive in the international market place where they were once hopelessly over priced. Not that we would recommend devaluing the US dollar as a remedy for US competitiveness, as Britain found in the 1970’s and 80’s it is at best a short term solution, but as China’s dollar costs rise we may at least see the flow of more labor intensive jobs to China slow from the flood a few years ago.

From a personal point of view I will find it interesting during the coming year to see to what extent the currency and tax changes impact China’s consumption and exports of metals. As we have previously posted, the Chinese government has taken deliberate steps to try and reduce exports of basic steel products and certain non ferrous metals while at the same time increasing incentives for imports of other metals. The currency movements will amplify that process as imports appear cheaper to Chinese consumers but exports less attractive. Where Chinese consumption has been the main driver of price for certain commodities, like Copper, this could see the resurgence of Chinese demand and support for prices in the year ahead. The recent abolition of import taxes on refined Copper has already seen renewed buying interest.

So whatever your particular metal interest is 2008 is likely to see China continue to play a significant role in determining price and availability. We now have the additional dynamic of currency on top of supply and demand to increase the volatility.

–Stuart Burns

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