Yuan strengthens further against USD; how will China’s petchem exports be affected?

The Chinese yuan has begun to strengthen against the dollar over the last month as the greenback has weakened due to growing expectations of potential interest rate cuts in the US. Particularly since early August, the appreciating yuan has been cutting into the profits of Chinese companies seeking growth from exports.

This has recently found some immediate reflection on some of the key petchem exports of China, while it also raises the question of how this will impact China’s PP, PVC and PET exports in the medium and long term.

Chinese yuan surged to 2024-high

On Monday, the Chinese yuan (CNY) soared to its highest level of 2024 against the US dollar, dipping below 7.1. Having weakened a little in the following days, it traded around 7.13-7.14 on Wednesday. Compared to July, when 7.27-7.28 was seen, the current levels represent a strength of more than 2%.

Chinese exporters have been quickly exchanging their US dollars for yuan, anticipating that the Chinese currency will continue to appreciate, according to multiple sources from export companies speaking to Caixin.

This currency shift comes amid a global stock market sell-off as investors reassess the U.S. economic outlook and potential interest rate cuts, CNBC said. A strong US dollar has historically kept the Chinese yuan weak. However, after weakening in the first half of the year, the yuan has started to strengthen against the dollar over the last month.

Recent foreign exchange fluctuations are expected to reduce accounts receivable profits by approximately 2% this month. A sustained appreciation of the yuan could prompt Chinese suppliers to raise prices, potentially impacting the export business.

*Image source: wise.com, illustrating the performance of the CNY against the USD in the past six month

Knee-jerk reaction seen in PP exports

Export PP prices out of China have been falling almost since early June with the slump deepening particularly in the past one month. The downturn that kicked off in July in freight shipping markets played a crucial role in these decreases, even so buyers in Vietnam, the first home to Chinese PP, still showed little interest in Chinese offers, not finding them competitive enough.

This week, however, players reported that the strengthening yuan has pushed sellers to stand firm on their export offers after weeks of price declines. “It seems the export window is currently closed,” said one Chinese trader, while higher prices are even pronounced. Affirming these comments, Reuters also argued that many trade companies, particularly smaller ones, have adopted a strategy of preferring to decline export orders rather than accept those that would result in losses.

Will further yuan appreciation prevent China from boosting exports?

How the recent appreciation of the yuan – particularly if sustained – will affect the petrochemical sector, especially the exports of polypropylene (PP), polyvinyl chloride (PVC), and polyethylene terephthalate (PET), in which China is a significant player as a net-exporter, is yet to be seen. China’s PP, PVC and PET exports reached record levels in H1 2024 while further yuan appreciation could mean that this growth may lose momentum.

ChemOrbis Stats Wizard data reveal that China’s PVC exports during H1 2024 recorded a visible increase of 17% when compared to the same period of last year to hit a fresh record of more than 1.3 million tons. Likewise, PET bottle exports hit an all-time high in the first half of the year with more than 2.7 million tons, suggesting a yearly increase of 24%.

China’s cumulative PP exports in H1 of 2024 , meanwhile, surged by 88% when compared to the same period last year to be reported at more than 1.2 million tons. H1 export volume expanded on a yearly basis to its highest figure since ChemOrbis began collecting data in 2002. Notably, the figure is almost equal to the total export volume in the whole of 2023, which stood at around 1.3 million tons.

A plethora of headwinds

China’s slower exports may also intensify the pressure on the local markets, where supplies are almost always long due to excess availability in the midst of new start-ups and more capacity additions to come.

Moreover, while export growth may slow down, the appetite for imports is likely to grow, as was already the case in overall July exports and imports. This has also been recently evident in the PP market, where import prices have moved below local prices – as they theoretically should do so given their additional costs to localize material and their transit times – after four months. In other words, import prices have recently been found to be more competitive than local prices, in which the recently appreciating yuan has played a role, making imports more attractive.