How a stronger yuan could help China, amid anxiety about rising commodity prices

Even though yuan strength might make Chinese exports more expensive, international demand for Chinese goods appears fairly constant

As Beijing seeks to mitigate inflationary risks, it has signalled its willingness to tolerate some degree of yuan strength

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Two workers build a steel structure at a construction site in Beijing on May 8. China is intensifying efforts to rein in prices of metals and other commodities, amid inflation concerns. Photo: AFP

UK-based Neal Kimberley has been active in the financial markets since 1985.

Published: 2:30pm, 1 Jun 2021Updated: 10:37pm, 1 Jun 2021

Rising commodity prices, as China’s economy emerges from the coronavirus pandemic, have attracted Beijing’s attention. A stronger yuan could be a useful ally in attempts to reduce the risks of imported inflation. Yet Japan, once again preoccupied with the risks of deflation, is taking a different tack: a weaker yen might suit Tokyo.

While Beijing might not wish to see the renminbi strengthen too far, too fast, currency market participants may yet conclude that there is still some upside for the yuan against the yen.

With many commodities priced in US dollars, a stronger renminbi should appeal to Beijing as it seeks to mitigate commodity-price-related inflationary risks. Admittedly, a stronger currency erodes the competitive advantage of China’s export sector, but that is not Beijing’s primary focus now.

Indeed, it is worth considering that, even though yuan strength might make China’s exports more expensive, international demand for Chinese goods appears fairly constant. After all, China is the go-to manufacturer for the world, and higher prices caused by the Trump administration’s tariffs haven’t weighed on US consumer demand for Chinese goods.

It is quite clear that policymakers in Beijing have decided to address the issue of rising commodity prices. In April, China’s Financial Stability and Development Commission, headed by President Xi Jinping’s top economic adviser, Vice-Premier Liu He, raised concerns about potential risks to the Chinese economy arising from high commodity prices and inflation.

On May 23, having met key companies in the iron ore, steel, copper, coal and aluminium industries, the National Development and Reform Commission (NDRC) said it would show “zero tolerance” for illegal activity, including price fixing, disseminating false information, metal hoarding or any speculative activity.