China resource demand to falter if yuan fails to jump
One factor, a top HSBC analyst says, is that the yuan's rise will likely be much slower than when China first loosened its currency in July 2005. At that time, a virtuous cycle of rising real-estate prices and inflows of speculative capital put upward pressure on the yuan.But this time, HSBC's Hong Kong-based co-head of Asian economics research Qu Hongbin said in a research note: "We believe the pace of appreciation against the U.S. dollar will be much slower than the pre-crisis rate."
A key difference between the current environment and that of the previous revaluation is the state of China's property market.
In 2005, property values were just beginning their long march upwards, but today's bubble-like valuations make it more likely that real-estate prices -- in major cities at least -- will decline in coming months, as tighter policy and other administrative measures to curb speculation take effect, Qu said.
He said a property-price correction "seems inevitable," dashing hopes that the yuan's new flexibility will translate in gains for the currency, as many market participants expect.
It's even conceivable that the yuan could continue to decline against the greenback, especially if the euro continues to weaken.
"Hot money inflows are not driven just by currency-appreciation expectations, but also by expectations on asset prices," Qu said.
Biting into demand
The unfolding dynamic isn't bullish for commodity prices, as weaker fund inflows mean China won't see the surge in fixed-asset investment that helped make it the world's fastest growing major economy.
In fact, signs of a slowdown are evident, as fixed-asset investment growth cooled to 18.5% year-on-year growth in May. This compared to year-on-year growth of 28% in October-December of last year.
The yuan weakened against the dollar in Asian trading Tuesday, giving back up much of Monday's 0.4% gain that lifted the currency to a new high against the U.S. dollar. The yuan ended trading Tuesday at 6.8136 per dollar, down about 0.23% from Monday's close.
Monday's gains follow a two-year period in which the currency was held in an unofficial peg to the U.S. dollar. Before the de-facto peg, the yuan had risen 21% against the dollar in the three years to July 2008.
Though China's currency is widely expected to continue its rise against the U.S. dollar, the size of the advance is unlikely to overcome price swings that have seen some industrial commodities surge by up to 20% in recent weeks.
Royal Bank of Scotland forecasts the yuan will rise 3% against the dollar by the end of the year, a rate that's unlikely to spark a surge in consumption among mainland Chinese buyers.
"A modest increase in the purchasing power of the yuan is unlikely to lead to sharp increases in Chinese commodity imports," said RBS analysts headed by Nick Moore in London.
Question marks over the sustainability of the recovery in U.S. commodity demand, along with weaker uptake in Europe, won't add much support to prices, he said.
China is even likely to undergo a period of faltering demand for iron ore, copper, nickel, coal and other industrial commodities as its building boom cools.
The pipeline of government-funded infrastructure projects, a major source of stimulus spending that helped insulate the economy from the collapse in global trade, is set to "slow meaningfully" this year and throughout 2011, said HSBC's Qu.
"New regulations on local government financing vehicles will close the door for local governments to borrow from banks to start new infrastructure projects," Qu said
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