Commodity prices could gain an extra fillip next year from the strengthening of the Chinese yuan, if Beijing is forced to turn for extra ammunition in its fight against rising inflation.
Many observers see the yuan continuing its gradual appreciation next year, a trend it has continued since Chinese authorities in 2005 loosened the currency's peg with the dollar. The yuan has gained an average of 4.2% a year against the dollar since then, and is expected in the market to rise by perhaps 5% in 2011.
However, there is the potential for China to allow a speedier appreciation if it fails through its policy of successive tightening in bank lending and higher interest rates to get a grip on inflation, which hit 5.1% in November, up 0.7 points on the November rate.
Food prices were the main contributor, jumping 10.1% month on month.
A stronger yuan would enable China, the top importer of crops such as cotton and soybeans, more cheaply to buy goods priced in other currencies.
Exports vs imports
"China has to balance the harm that a stronger currency would do to its exports with the damage an artificially weak currency is already doing by making its imports more expensive," a City currency trader told Agrimoney.com.
"Inflation has a history of proving more hard to tackle than people think. China might find it has to allow its currency to rise, rather than try to get inflation down by sending interest rates zooming."
At Phillip Futures, Ker Chung Yang said that, with a stronger yuan meaning reduced commodity costs, currency appreciation "could be a useful tool for China to reduce the rate of inflation on commodities".
He added: "This would also be a further boost for America farmers, who get paid in US dollars."
Key visit
China's policy of linking the yuan to the dollar has gained widespread criticism from foreign observers for giving the country what it seen as an unfair advantage in exports.
It is seen as coming back to the fore again next month, when China's president, Hu Jintao, visits the US, a particular critic of Beijing's currency controls.
"That could be a catalyst for some small concession by China," the City trader said.
"But I think any more significant move would more likely to require a real inflationary reason, which China could dress up to make look like a favour to the international community."
