Renminbi Revaluation Imminent Says Goldman Sachs

We have not been alone in saying we could see a revaluation of the Chinese Yuan or Renminbi against the US dollar this year so anyone reading our columns will not be surprised to hear that no less than Jim O’Neil, Goldman Sachs chief economist agrees “something is brewing in China and a currency revaluation could be imminent. After defending the peg against intense international criticism for most of last year it clearly isn’t international pressure that is prompting the re-think. O’Neil thinks it is runaway growth that could be the spur.

The article in the Telegraph states that China’s economy grew at 8.7% in 2009 although growth was accelerating towards the end of the year, and is forecast to grow at 11.4% this year. The central bank has repeatedly tried to control domestic lending by banks. Just last week the central bank told lenders to increase their reserve levels by 0.5% to 16.5% by February 25, in an attempt to curb lending. However, a new survey shows that a similar increase in January had little impact, with Chinese banks approving 1.4 trillion yuan ($200bn) of loans last month, one of the highest monthly totals on record.

A rise in the Yuan would impact exports at a time when they are struggling because of the after effects of the world recession, namely depressed and sluggish growth in the developed world. But a revaluation would boost imports particularly from neighboring countries such as Taiwan, Thailand and South Korea. China features prominently in the recovery of the export-orientated economies of Taiwan and Thailand. Taiwanese exports to China, its biggest trading partner, rose 45% year-on-year in the fourth quarter according to a Financial Times article. China’s domestic market has also become an important market for Taiwan – exports for final consumption in China have grown from 17.8% of Taiwan’s total exports at the beginning of 2009 to 29.2% last month.

This trend is echoed in Thailand, where January’s exports to China grew 94% year-on-year, although admittedly from a low base in late 2008. The recovery was supported by renewed demand for electronics and rubber – the latter an indication of a recovery in automotive demand in China. So the west is not alone in hoping Jim O’Neil is correct in his belief that China is about to revalue. Any buyers of material on long term contracts from China should review margins and see if the figures being discussed a possible 5% increase are likely to impact their supply economics. Even if companies buy in dollars their supplier is operating in local currency and we all know that means sooner or later they will look to adjust prices to compensate for the change.

–Stuart Burns

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