China devalued its currency last week, provoking endless speculation on what a potentially weaker Renminbi means for global commodity markets.
On Aug. 11, the Renminbi, or yuan, sank 1.9 percent relative to the U.S. dollar. This was its largest single-day devaluation since 1994 and the currency dipped again the following day. The drop shocked traders and pushed commodity prices down around the globe.
Errol Anderson, a commodity broker and president of ProMarket Communications in Calgary, said the currency devaluation, along with massive one day declines in Chinese stock markets, such as an 8.5 percent loss in the Shanghai Composite in late July, are signs that China’s purchasing power is on the wane.
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“When their stock market broke about three weeks ago… China just absolutely vacated the world commodity markets. I think it just stunned the world, how quiet it got,” Anderson said. “They just stopped buying…. I think that was a real warning of the power of China.”
For years, traders and market analysts claimed that robust Chinese demand for agricultural products should provide long term price support for things like soybeans, canola and corn.
Anderson said China’s role is now changed. With a faltering economy and weaker currency, Chinese buyers may exercise their power to devalue commodities.
“China is going to eat cheaper…. They can force (price) down,” he said. “In the world of supply and demand, they are not equal. Demand is king over supply.”
A Canadian expert in the Chinese economy, who cannot be quoted in the media because of the federal election, said the drop in the yuan isn’t going to fracture agricultural commodity prices.
He said the People’s Bank of China made the move as part of a larger initiative. The Chinese government wants the yuan to become a global reserve currency, alongside the U.S. dollar, the euro, the pound and the yen.
Before that happens, the International Monetary Fund expects China to loosen its controls over the yuan.
“This will allow the (yuan) exchange rate to be more market-driven,” the Canadian expert said.
While the yuan did lose 2.7 percent against the loonie in the second week of August, the bigger picture suggests that China’s currency remains relatively strong.
“If you widen the scope to the beginning of last year (2014), it (yuan) is actually increased by 11 percent… in value (compared to the loonie),” the analyst said. “So Canadian products only got a little more expensive in the last week.”
Last week, the People’s Bank of China intervened in the currency market to minimize losses against the U.S. dollar. The move demonstrated that China isn’t planning to devalue and initiate a currency war because the country’s leaders yearn for stability, the analyst said.
The analyst said he remains optimistic about Chinese demand for imported food.
“Every year China’s middle class grows by the size of Canada. That community has a very strong appetite for high quality proteins,” he said. “As demand for meat continues to increase, the demand for grain increases tenfold.”
J.P. Gervais, chief agricultural economist with Farm Credit Canada, said the yuan may now trade in a “lower band”, but it shouldn’t have an impact on China’s demand for agricultural goods.
“Yes, prices may go up for Chinese buyers and that may trigger a few changes in their purchasing patterns, but I don’t think it’s significant enough… to fundamentally change the outlook for the world markets.”
Gervais said the state of China’s economy has more influence over commodity prices than the value of its currency.
China is shifting towards a consumer-driven economy. If Chinese citizens feel less wealthy, it could diminish demand for imported goods.
“I’m keeping an eye on what consumers are going through in China,” Gervais said. “Things like the stock market in China… the real estate market, consumer spending, household income.”
