Yuan’s depreciation will dampen global spill-overs of Chinese reflation - RBS

Research Team at RBS, suggests that one key precondition for China ‘exporting’ inflation is a strengthening or at least stable yuan against the dollar, which amplifies the impacts of China’s rising prices for the rest of the world.

Key Quotes

“This, however, is no longer the case. With the yuan reversing its decade-long uptrend and set to depreciate further in the coming year, Chinese inflation will be partly absorbed by a weaker yuan when converting to dollar prices, dampening its spill-overs to global prices.”

“Moreover, given anaemic global demand, Chinese exporters are expected to follow the price-to-market strategy and refrain from hiking prices. In fact, with profit margins in good shape and supported by improving downstream/upstream price gap during the past year, Chinese manufacturers are well placed to keep export prices stable for a while.”

“China’s spill-overs will thus manifest themselves more directly on global raw material and commodity prices, which are already underway and expected to run its course in the next couple of quarters, but less so through manufacturing exports.”