February 12, 2004

Possible Effects of A Renminbi Upward Revaluation on China's Corn Prices

An eFeedLink Exclusive Report 

As China continues to implement reforms in its financial system, the country's currency exchange policy may see some changes, particularly in the upward revaluation of the Renminbi. According to information extracted from some sources in China, the specific measure taken to revalue the Renminbi would take the path of: First, widening the floatation range of the Renminbi exchange rate, followed by a reform of the exchange rate mechanism by year end 2004, and pegging the Renminbi to a basket of currencies.
 
News in the financial market is saying that through widening the floatation range of the Renminbi exchange rate, China Central Bank will steer the RMB-US$ exchange rate to rise from the current 1:8.277 to 1:7.887. The source reckoned that the Central Bank might raise the value of the Renminbi by 5% in March 2004. Thereafter the process will gradually be left to market forces, finally establishing the Renminbi exchange rate mechanism.
 
This is the so-called Renminbi upward revaluation which has been widely discussed of late.

Set aside the political and economic underpinnings and implications of the Renminbi upward revaluation, this contents is to briefly explore how an upward revaluation of the Renminbi will affect China's corn import and export trade.
 
Apart from the supply and demand situation, price is another key determinant in any commodity exchange. In this case, a 5% Renminbi upward revaluation is certain to influence corn prices in China and will affect the export of the country's corn.
 
Put simply, Renminbi upward revaluation will mean cheaper Chinese agricultural products in the country. Specifically, with the same dollar, more can be bought after the upward revaluation of the currency. Using the current corn imports and exports as an example, assuming that the current export price is RMB1200/ton, 5% of RMB1200 is RMB60 (revaluation amount). If the same price is retained as the export quote, the buyer, having to fork out more US dollars, will certainly find it unacceptable.

Similarly, foreign traders will get more US dollars in return if China's corn imports are based on the original quote. Thus, the Renminbi upward revaluation will drive up foreign traders' initiative to export corn to China.
The aforementioned situation would also apply to wide range of agricultural products, processed farm products, poultry and livestock products using crop-based feed, as well as some industrial products.

As a consequence, the short-term impact of the Renminbi upward revaluation on the global market is that China would have reduced exports and would be importing more from other countries. As for the corn market in China, this undoubtedly would be key in influencing the country's corn price movements.                              
 
As soon as China implements the Renminbi upward revaluation, industry analysts expect global demand for China's corn and poultry products will inevitably fall. This, coupled with a likely increase in corn imports in China, will put downward pressure on China's corn prices in the aftermath of a Renminbi upward revaluation.