The policy shift of the Chinese Government to un-peg the renminbi against the greenback is likely to have a short-term boost for Australian commodities, given the consensus view that the currency will be managed up slightly over the next few months.
While commentators differ on how much the Chinese authorities will allow the currency to rise – or how quickly – they universally see it as a successful political move ahead of next weekend’s G20 summit in Canada.
The renminbi was left unchanged against the US dollar yesterday, notwithstanding the introduction of a “more flexible” exchange rate policy announced over the weekend.
The People’s Bank of China said in one of its two weekend statements that a significant appreciation of the renminby was not in China’s interests and the exchange rate would remain “basically stable”.
Citigroup Global Markets reissued a recent study yesterday which detailed the likely results of a gradual appreciation of the renminby – “at around a 3 per cent per annum pace”.
In the short term, the higher Chinese purchasing power should be positive for commodities, resource equities, the Australian economy and Aussie equities, the report says.
In the longer-term, the result may not be as rosy: “A stronger RMB is a form of policy tightening used to moderate growth and control inflation. Slower Chinese growth should be a negative for commodity prices, the Australian economy and Aussie equities.”
Equities in the retail and consumer space stand the most to lose, given that they source the majority of their products from China. Transport and gaming stocks should gain.