China Could Really Use A Stronger Renminbi To Boost Its Real Estate Sector

Includes: CNY, FXI, JJC, MXI, USO, UUP
by: Emerging Money

By Jonathan Yates

Residential and commercial construction in China should benefit greatly from the renminbi rising in value and global prominence. Image courtesy Ernie: there has been drastic overbuilding in China, the People’s Republic needs its real estate sector to rebound in order for growth in the country to continue at required levels.

When a country’s currency rises in value, imports become cheaper as goods priced in foreign currencies are worth proportionally less.

As an example, if the renminbi rises 5% in value against the U.S. dollar, then products priced in greenbacks become 5% less expensive for Chinese buyers.

So all imported goods used in building a house or office, such as copper for the wiring and piping, or iron ore for the steel, will cost much less for Chinese end users.

The construction market in China will also benefit from Iran now accepting the renminbi as payment for oil. Just like for other goods, the renminbi rising in value will make oil that much cheaper. In addition, foreign exchange will no longer have to be earned to pay for Iran’s black gold. It’s likely more oil exporters will eventually take the renminbi as payment too.

This will directly help the Chinese construction market as many construction products are tied to the price of oil. Chemicals and paints used in construction have petroleum bases, as does asphalt, all of which rise with the cost of crude oil.

Indirectly, the transportation factor will now bode bullishly for the Chinese construction market. Prices will be lower and the cost of fuel to transport goods to and from building sites will follow. In addition, lower fuel costs will make outlying neighborhoods, office parks, and industrial facilities more viable.

China will also prosper indirectly from having less capital – both domestic and foreign – flow outside its borders. This will allow more capital to be dedicated to developing China’s economy rather than being diverted to pay for foreign goods and services. As China is the biggest importer of many commodities such as copper and iron ore, that is a very significant sum of money. Having those funds recirculated in China rather than abroad will be propitious for further economic growth.

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