As cheap as chips
Source of picture: europa.eu
By John Richardson
THE decline in the Euro has resulted in investors downgrading their expectations of a Yuan appreciation taking place over the next few months.
Last week, Yuan foward contracts were factoring in a zero chance of appreciation over the next three months after there were few mentions of the issue during US-China talks.
This could have important implications for imports of chemicals and polymers into China, which, according to traders, have been bolstered by complex multiple trades in all sorts of commodities – and even property.
How it works is that you borrow first in US dollars to pay for the imports and then seek to maximise local-currency revenue by trading across a range of commodities. Sometimes this might even involve selling a chemicals or polymer cargo below cost in order to generate Yuan to make a profit elsewhere.
The end-game is to generate profits in Yuan before greenback borrowings have to be repaid.
We have heard that shell companies have been set up where local-currency earnings from these trades are being stashed in readiness for cashing-back into US dollars when the time is right.
This type of speculation might clearly dip if the belief becomes well-established that the value of the Yuan isn’t going to budge anytime soon.
Polyolefin imports are already under downward pressure from China’s rising self-sufficiency.
I am afraid we haven’t got a clue about how important this kind of speculation has been for imports over the last year or so. We will keep on attempting to find out, of course, without much hope of getting a clear answer.
It is also possible that those playing a longer game might continue this kind of speculation. At some point it seems inevitable that a gradual appreciation of the Yuan will be resumed following the decision in 2008 to put strengthening of the currency on hold.