In a new report Standard & Poor’s Ratings Services suggests that the recently announced change in China’s exchange-rate policy will have a negligible short-term impact on Canadian corporate credit quality.
The Chinese authority revalued its currency up by 2.1% against the U.S. dollar and declared its intention to adopt a managed float to an undisclosed basket of currencies. “The decision by the People’s Republic of China to peg the yuan to a basket of currencies is in line with expectations and the economic effect, if any, on Canadian businesses should be small,” says Standard & Poor’s managing director Mark Mettrick. “In fact, the removal of the dollar peg is a good thing, as it addresses a major imbalance. However, the initial adjustment was rather modest.”
China is Canada’s second-largest trading partner, a distant second, behind the U.S., S&P notes. According to Canadian government statistics, Canada’s trade with China has almost doubled since 2000 to more than $30 billion last year. In 2004, trade between Canada and the U.S. was $557 billion.
For Canadian shipping and trade volumes, the overall effect could be slightly positive, S&P suggests, “it will help dampen potential North American tariffs and sanctions, and will help maintain the current volumes and patterns. Canadian railways, ports, and trucking firms are all expected to continue to benefit from strong trade activity through western Canada gateways.”
“In addition, even if there is a substantial yuan appreciation, there is little chance that any offshore production would ever come back to Canada, regardless if China is the manufacturing location or not,” says Mettrick.
The modest revaluation should have little impact on global commodity prices, it adds. Canadian commodity producers, particularly base metals and oil and gas, will continue to benefit from global demand and tightened supplies, it says.
S&P suggests it would take an appreciation of the yuan of 15% or more before any effect would occur. “A much larger revaluation might very well help support the current high commodity prices, but that is not certain,” says Mettrick.
However, it also cautions that a large revaluation could have negative effects too. “The cautionary offset is the size of the Chinese current account surplus, and if the country would continue to be able to afford its current and expected levels of imports. Chinese demand is currently a key driver in many commodity markets such as oil and nickel,” it says.
“There is also a cautionary offset to more substantial yuan appreciation in Canadian inflation rates. Canadian companies are currently benefiting from a low interest rate environment and robust domestic demand,” Mettrick adds.