Viewpoint: Yuan likely to keep bolstering China prices

The past six months have seen Chinese export prices for certain key metals gain support from yuan-dollar exchange rate movements, and that support is likely to remain in the near term owing to the country's continued economic recovery and fiscal policies.

At time of publication the yuan stands at 6.52 against the dollar. This compares with 7.17 to the dollar on 27 May and 6.96 at the end of December 2019. Its trajectory has in part been underpinned by the country's economic recovery following Covid-19 lockdowns, which started just as the pandemic was building momentum in other regions. As of 27 May, just over 6mn Covid-19 cases had been registered globally — that number has since soared to 72.1mn, dragging down economic growth in the process.

But the Chinese currency has also been responding to Beijing's fiscal policies and high interest rates — in particular "the combination of implicit monetary tightening and strong credit growth, contributed in part by loose fiscal policy", RBC Capital Markets said. Chinese authorities and banks have lately taken steps to slow the yuan's movements, increasing the frequency of dollar fixings and adjusting the methodology for those fixings — indicating that Beijing wants to rein in the pace but not necessarily change the currency's trajectory, said Alvin Tan, Asia FX Strategist at RBC.

Forecasts vary but most analysts currently expect the yuan to reach a value of 6.3-6.4 to the dollar over the course of 2021.

The valuation of the yuan has been a contributing factor in the recovery of certain Chinese export metal prices — such as antimony and magnesium — in recent months, particularly notable given the sluggish overseas demand facing those metals as other economies remain heavily under the shadow of Covid-19. Exporters of antimony and magnesium have repeatedly hiked prices or staved off price cuts despite tepid buying interest, arguably resulting in more robust price growth than the underlying demand-supply fundamentals would necessitate.

At time of writing, fob China prices for min 99.65pc antimony metal stand at $6,200-6,500/t, up from a 2020 low of $5,250-5,450/t fob through most of July. Prices for min 99.5pc antimony trioxide are at $5,600-5,700/t fob China, up from their July low of $4,400-4,500/t. Meanwhile, fob China prices for min 99.9pc magnesium have risen to $2,430-2,490/t as of mid-December, after bottoming out at $1,870-1,930/t fob in the first half of October.

The impact of the yuan's movements on seaborne minor metal prices typically varies depending on the metal, its production and processing cycle, the extent of China's dominance as a global supplier, the scale of China's domestic demand for that metal and, in connection with that, the purchasing power held by Chinese buyers booking material in yuan.

Meanwhile, the dollar is widely expected to depreciate further in 2021, with US bank Goldman Sachs recently describing it as "meaningfully overvalued" by around 10pc based on standard metrics, and forecasting a 6pc decline in the trade-weighted value of the dollar over the coming year.

The dollar's recent and anticipated depreciation is in part connected to hopes of a global economic recovery and increased risk appetite — particularly if Covid-19 vaccines are successfully rolled out at scale in the coming months.

By Ellie Saklatvala