Despite reduced Chinese demand for commodities needed for manufacturing and construction, China now manufactures more vehicles than any other nation – so many in fact that employers struggle to find enough workers. The growth in Chinese auto manufacturing has helped nurture and sustain the emerging middle class which must help alleviate government concerns about possible social unrest in light of job losses in coal mining and construction. While Chinese metropolitan areas continue to limit the number of vehicles allowed within city limits due to concerns about air pollution, Chinese President Hu Jintao has pledged to increase investment in rural infrastructure which will likely include additional paved roads and thereby induce more auto sales and use.
Now that the International Monetary Fund has agreed to include the Renminbi in its Special Drawing Rights next year, the RMB will likely trade in a larger range than when previously pegged to the US dollar. The People’s Bank of China has recently cut the Yuan’s reference rate to the weakest since 2012 triggering depreciation in anticipation of the speculated increase in US interest rates by the Federal Reserve this month, which may increase the cost of Chinese crude oil imports in US dollars in the short term, possibly causing a pullback in demand.
The PBOC is evidently also concerned about net capital outflows. Julian Evans-Pritchard, China economist for Capital Economics, has noted that the PBOC is selling assets to prevent the RMB from weakening too quickly to reduce concerns that rapid deflation could set back international use of the currency and rebalancing toward consumption.
Free market economists generally agree that a nation cannot achieve the Impossible Trinity of reducing interest rates to boost growth while resisting a depreciation of its currency as money flows out of the country. Because China enjoys foreign currency reserves of over $3.5 trillion US, it has plenty of dry powder to defend the RMB should speculators attempt a run akin to the George Soros 1992 run against the Bank of England in 1992. Any defense of the RMB that preserves its relevant strength to the US dollar has the collateral benefit of stabilizing the cost of importing crude oil priced in US dollars.
Unless China can force Russia and Saudi Arabia to pay for more crude oil imports in RMB, China’s defense of the RMB will likely make the increased imports of crude oil necessary to grow and sustain its middle class employment and lifestyle more affordable in a future of both volatile currency risk and crude oil prices.
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