China's revaluation, an impact on the market?

China’s revaluation, an impact on the market?

It has long been known that China was under great pressure from its trading partners to revalue its currency because it was deemed undervalued. The US Congress was preparing measures to force the issue. The US has blamed the “undervalued” yuan for the growing trade deficit with China. Yesterday, the People's Bank of China revalued the Yuan against the US dollar by around 2% and pegged the currency to a managed floating exchange rate regime based on a basket of currencies. Details of the new regime were outlined in the SteelOrbis news China stops pegging yuan to dollar. The first reaction by the market has been that the revaluation is very small. The bulletin notes that financial experts were expecting a 3-10% revaluation and some even believed a 20% revaluation could be pursued. It also highlighted that a revaluation of even 10% would have minimal effect on US businesses and the trade deficit. “While it may help defuse some political tension, a relaxed peg is likely to have limited impact on the U.S. trade imbalance with China. Even a 25 percent revaluation (which seems out of the question) is projected only to reduce the current account deficit by five percent or less. An appreciation of the magnitude discussed above (10 percent) would likely lead to no more than a $10 to 15 billion improvement in the U.S. trade balance with China.” Experts say that China's exports were unlikely to be hurt since they are already highly competitive. Similar comments were made by the US-based trade law firms which concluded that “generally revaluation will be of limited consequence to the U.S. and U.S. businesses.” Because the revaluation of export prices on US dollar basis is not at a large scale, there will not be a significant change in this aspect. Meanwhile, it is foreseen that the iron ore and steel market of China will not have a deep impact due to the revaluation. The ore inventories in China which have been leading to an excess supply and the governmental restrictions on imports give way to predictions that there may not be a dramatic increase in imports, only local steelmakers may obtain cheaper import raw material supplies, thus achieve an advantage in their production costs. The reflection on the steel industry will probably be in terms of a slight decrease in the price of high value added steel products, and there will not be a significant change in other products. Because the supply of high value added materials is limited in China, it is known that these products still lean on imports. The value of imports will, although slightly, see a decrease following the revaluation. While the possible effects under the current revaluation rate of yuan are set hereafore, the conditions will become more intelligible when the Beijing government successfully passes through this trial.