China's Drop on Own Currency Raises Red Curtain

In an oil and gas world where crude prices are unpredictable at best, China’s August surprise to cut the value of its own currency did little to lighten the mood of the market or the oversupply of oil.

In fact, it made it worse, said Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices.

“The oil is priced in dollars; it will take more yuan to buy a barrel of oil. So they just made it more expensive for themselves. The world’s competition for market share from China just got changed because China as a customer may have completely changed the picture of who they are and what they’re able to do,” she explained.

Gunzberg noted that China’s government operates in such an opaque manner that it’s unclear how outside sources of oil may impact their own strategic petroleum reserve.

“Nobody knows what or how much it is. And as long as oil is really cheap, it might be fine, and then, it may exacerbate things,” she said. “If there is a market share competition and OPEC wants to continue supplying, they might have to push the price down even further to compensate for the currency that got devalued.”

Why would China make such a move? In many ways, even the experts say it’s a mystery.

“That’s impossible to tell. The Chinese government is opaque in many cases, and we don’t know why they would choose to devalue their currency. The government is hard to read,” Gunsberg said. “They were putting limits in the stock market drop, and then they let it free-fall. It’s just really difficult to predict why and what the Chinese government does. And that’s also why it’s so difficult to tell what’s in their strategic reserves.”

Brian Sharpe, managing director of regional investment in South Texas for U.S. Trust, a private bank based in Houston, said the unexpected and dramatic devaluation of Chinese currency introduced additional volatility into all financial markets.

“The real issue with China is the strength of their underlying economy,” he told Rigzone. “A devaluation may imply the Chinese government is not as confident in their economic growth.”

Sharpe said devaluing the currency can make Chinese exports seem cheaper to foreigners, and boost exports.

“It can also make foreign goods seem more expensive to the Chinese, and thus reduce imports,” he said.

Meanwhile, it would appear that China’s manufacturing and technology markets are broadening their influence. A Sept. 1 bulletin from the Standard & Poor’s Ratings Service, said many high tech firms have made inroads to the competitive domestic supply chain, “backed by aggressive government support.”

And, it’s been reported China is loaning Venezuela another $5 billion to help boost output in the country. China has handed over billions of dollars to Venezuela in oil-for-loans agreements designed by the late Hugo Chavez in 2007.