Yuan strength may spur commodity rally, fight recession

In a smart stroke of market dynamics (and stealth diplomacy?), Chinese currency Yuan has touched a 17 year high and reached beyond 6.4 per dollar. This is in the context of US Federal Reserve keeping the lending rates low thereby weakening US dollar further.

Yuan jumped 0.37% to close at 6.3945 in Shanghai, its biggest spike in nine months. It managed to touch 6.3895, the sturdiest level since factory of the world unified official and market exchange rates at the end of 1993, said Bloomberg.

So what does this mean?

A possible rally in commodities, and most importantly; a possible way out of looming recession

China is the world’s largest exporter and second largest importer of goods in the world. From oil to soybeans, China imports innumerable items to feed its burgeoning population.

With the yuan gaining strength, China may experience a shift in the said status: it can become the largest importer of and largest exporter of goods! This invariably translates into a rally in commodities and China’s transition from a developing economy to developed one.

This is how it is:

When yuan gains strength, Chinese exports are going to get expensive, but imports would get cheaper. When exports get to be expensive, the factory of the world can see a drop in inflation as there would be more finished goods available in the local economy at cheaper prices.

This would kick start a new cycle in China--which mainly relies on exports for sustenance—that would trigger a wave of domestic consumption in humongous scales. Such a development can bolster the world economy at large and help it pull out of the current slowdown, simple!

Remember, it was the Second World War that boosted surge in consumption of arms and armaments which kick-started the US manufacturing and pulled the New World from the rut of depression.

Traditionally, cycles of recession are followed by cycles of massive consumption and boom. When China starts to consume more, the world will have to sit-up and take notice given the massive scales involved; no wonder a rally in commodities is a clear possibility.

Also, as imports get cheaper, China can import more raw materials, add value to them and either use it for domestic consumption or export the same! (Exports getting expensive do not mean exports getting stalled.)

What China stands to gain is self-evident: By strengthening yuan, China can boost its domestic markets and stay away by a furlong from recession; Chinese export surplus for July is hovering at a record $31 billion, in a clear show of its export dependence.

It may be simplistic to assume that strengthening of yuan, in a swish of magic wand, would solve the global crises straddling the Atlantic.

But it may be the one of the ways out and which warrants a sure tryout.

As published in: http://www.commodityonline.com/news/Yuan-strength-may-spur-commodity-rally-fight-recession-41591-3-1.html