RMB Exchange Rate Reform Is Not Enough To Affect Commodity Prices.

China unexpectedly decided to allow the RMB exchange rate flexibility to be enhanced, but that is not enough to affect commodity prices.

This makes dollar denominated goods slightly cheaper for Chinese customers, which may theoretically boost consumption.

The timing of the adjustment has made the market somewhat unprepared (almost sure that the Chinese monetary authorities intentionally). But the direction of adjustment is not unexpected. Investors have been expecting RMB appreciation for more than a year.

In fact, what is really surprising is the degree of adjustment announced in the final announcement.

Unlike the renminbi remittance reform in July 2005, the yuan / US dollar appreciated by 2% at a time, and then allowed to expand the daily trading range. But this time there was no one-off appreciation, let alone overseas analysts and economists have been calling for a substantial appreciation.

This is what it looks like at the end of this month's G8-G20 summit. China will promise to increase the flexibility of the RMB exchange rate in the future.

Advocates of appreciation are concerned about the prospect of large exchange rate fluctuations in the coming months or years. From July 2005 to July 2008, the RMB appreciated by 16% against the US dollar in the three years of flexible RMB exchange rate.

However, the PBC has not made any commitment to the special exchange rate after the revaluation, or even a long-term goal.

The impact on commodities should be small, at least in the short and medium term.

(1) the market has always expected that the renminbi will appreciate in the medium term, so this factor should have been digested. If there is any difference, the small adjustment at the weekend may be disappointed by those who originally hoped to have bold actions and investors, which may be bad for commodity prices.

(2) the competitiveness of China's exports to Europe has weakened markedly due to the sharp appreciation of the renminbi pegged to the euro, and the increase in wages (at least in coastal provinces) has also led exporters to lose their competitive edge.

Given the small margins and the relatively low value added of many of China's exports, the authorities are unlikely to see a substantial appreciation of the renminbi against the US dollar, thereby further damaging the competitiveness of the country.

(3) some commentators have focused on the revaluation of the renminbi, which is seen as a prerequisite for pulling back the balance of China's demand and turning from exports to domestic consumption. In fact, the economy shows signs of overheating.

Inflation is higher than the government's target and wages are rising.

Guangdong, Fujian, Zhejiang, Jiangsu and Shanghai have been raising the minimum wage level for these export oriented manufacturing centers.

China's consumer price index (CPI) rose 3.1% in May, hitting a 19 month high and higher than the government's target of 3%..5's industrial output price (PPI) rose 7.1% compared to the same period last year, further stimulating domestic consumption. The most important thing is how to slow down the pace of economic growth and curb inflation, without triggering a sharp fall in prices and a sharp rise in unemployment.

(4) in short, in order to cool down economic growth and prevent inflationary pressures from further increasing, the policy in the next 12-18 months is likely to become more deflationary.

Despite the huge increase in the reserve requirement ratio this year, monetary policy still has a lot of stimulating effect. In.2008 and 2009, when the global banking crisis was going on, policy measures to reduce interest rates and reduce bank reserves to ensure growth were still needed to be reversed.

The overall import demand for commodities will continue to increase. However, the small steps taken by the Central Bank of China over the weekend to adjust the exchange rate are unlikely to push up import demand substantially or increase the recent upward pressure on US dollar denominated international commodities.