Commodity Gains on Yuan May Be 'Knee-Jerk' Response

LONDON, Jun. 22 -- The biggest jump in commodities in a week after China signaled it will relax the yuan's peg to the dollar is a "knee-jerk" reaction and investors should focus on prospects for slower growth, Standard Chartered Bank said.

Copper rose as much as 4.6 percent in London yesterday, leading gains in industrial metals, while crude advanced as much as 2.3 percent in New York and soybeans added 1.8 percent in Chicago. China is the biggest consumer of copper and soybeans and the second-largest user of oil. A stronger yuan would lower the price of dollar-denominated commodities for Chinese buyers.

"People's knee-jerk reaction is always: a yuan appreciation will lead to more imports of bulk commodities, but our analysis of empirical data showed there's no firm causal relation between the two," Judy Zhu, an analyst at Standard Chartered Bank, said in a phone interview from Shanghai yesterday. Economic growth will continue to drive consumption and a stronger yuan may only stoke demand from speculators, she said.

China growth, the engine of the global economic recovery, will slow to 9.6 percent in the third quarter and 9 percent in the following three months, from 10.5 percent in the second quarter, according to as many as 21 economists surveyed by Bloomberg. The government wants to cool real-estate speculation and imports of copper, aluminum and nickel fell in May from a year earlier, customs data yesterday showed.

Demand Concern

"A modest and gradual appreciation of the Chinese yuan is unlikely to lead to a sharp increase in Chinese commodity imports in the coming months," Royal Bank of Scotland Group Plc analysts Nick Moore and Daniel Major said in a report yesterday.

"We remain concerned about the sustainability of the recovery in U.S. commodity demand, weaker than anticipated demand in Europe, the impact of a slowdown in the Chinese construction sector and reactivation of idle production capacity," they said. RBS expects gradual yuan appreciation of 3 percent by end of this year, they said.

The yuan rose yesterday by the most since a July 2005 revaluation and forwards jumped after China's central bank ended a two-year peg. The People's Bank of China said June 20 that a stronger currency will help curb inflation in the world's third-largest economy and shift investment toward service industries from export-manufacturing.

'Fading Enthusiasm'

"As the yuan appreciation is also a tightening policy for the economy, the initial enthusiasm will likely fade" in commodities, Wang Tao, an analyst at UBS AG in Beijing, said in a report June 20.

China's yuan declined the most since December 2008 today on speculation the central bank will encourage more two-way fluctuations in the exchange rate after it pledged to expand flexibility.

The currency fell 0.2 percent to 6.8095 per dollar as of 12:01 p.m. in Shanghai, from 6.7976 yesterday, according to the China Foreign Exchange Trade system. That was the biggest loss since December 2008. It strengthened as much as 0.1 percent to 6.79 earlier today.

"As the ultimate revaluation in the yuan is likely to be less than 5 percent at best in 2010, we see the impact on commodity demand as marginal in the short-term," Hussein Allidina, head of commodity research at Morgan Stanley said in a report today.

'No Impact'

Chinese authorities had prevented the currency from strengthening against the dollar since July 2008 to help exporters cope with the global financial crisis. The currency appreciated 21 percent in the three years after a managed float against a basket of currencies was introduced in 2005.

The Standard & Poor's GSCI Total Return Index of 24 commodities advanced as much as 1.9 percent yesterday, the steepest gain since June 14.

"Some commentators say this move is positive for commodities. We disagree," Qu Hongbin, chief China economist at HSBC Holdings Plc, said in a June 20 note. "This is all about resuming flexibility rather than quick appreciation, so it should not have any meaningful impact on the Chinese demand for commodities and resources in the near-term."

Chinese demand accounts for 41 percent of the world total for cotton, 36 percent for lead, 35 percent for zinc, 33 percent for aluminum and 23 percent for soybeans, according to Goldman Sachs Group Inc. It's 9 percent of the total for oil, the New York-based bank estimates.

Economic Fallout

Refined-copper imports by China declined 9.7 percent in May from April, falling for a second month, according to Bloomberg data.

"China is still an economy in transition which relies on exports as its main driver, so a revaluation may hurt the economy and affect the government's efforts to fine-tune growth," said Dong Shuzhi, an analyst at Jinshi Futures Co., said by phone from Shanghai yesterday.

Copper on the London Metal Exchange dropped as much as 2 percent to $6,470 a ton today after yesterday gaining by the most since May 18 on an intraday basis. It traded at $6,591.75 at 12:15 p.m. in Shanghai.