OREANDA-NEWS. A drop in the value of the Chinese yuan against the dollar is likely to have an only-limited impact on short term energy demand. But over the longer run it raises questions about the government's commitment to economic rebalancing.

China's central People's Bank of China (PBOC) allows the currency to trade in a band either side of a daily fix to the US dollar. It has been gradually widening the band from 1pc and, last month, announced plans to increase it to 3pc. But on 11 August it cut the daily fix to its lowest level since May 2013. The PBoC's daily fixes on 12-13 August were lower still.

Ostensibly this reflects the yuan's tendency to trade, on the spot market, near the bottom of the tolerated 2pc range. Beijing wants to internationalise the yuan to the point where it becomes a reserve currency, and allowing market mechanisms to set conversion rates is considered central to that project. But the PBoC's decision to let the currency weaken, against a backdrop of worsening economic data, has raised fears among some that Beijing is starting a trade war. A weaker currency lowers the cost of Chinese goods to overseas buyers.

Chinese manufacturers have lost much of their competitive advantage in recent years, as the shale oil boom has led to a surge in production of low-cost petrochemical feedstocks for US manufacturers. Chinese exporters have also been struggling to remain competitive in Europe and Japan, where quantitative easing weakened the euro and the yen.

Chinese exports now cost less in other currencies than they did, but dollar-denominated oil imports cost more. The impact on energy demand is likely to be slim in the short term as larger factors are at play.

Oversupply is driving down international crude prices at a faster pace than the Chinese currency is weakening, and pushing up the cost to importers. Crude imports, costing around half last year's levels, continue to rise because the country is filling its strategic petroleum reserve (SPR) in response to falling prices. The yuan is worth $0.156 today, down from $0.163 a month ago, a decline in value of 4.3pc. The estimated cost of Chinese crude imports is lower over the same period by 17pc, at $49.64/bl.

The currency move should erode the purchasing power of China's growing middle classes, especially coming so hot on the heels of the stock market collapse in June-July — the stock market was dominated by retail investors. It is certainly likely to affect imports of foreign cars. Car sales were already weakening — 1.24mn units in July was down by 7.7pc from June and lower by 1.1pc from same period last year.

The currency devaluation is unlikely to have much of an impact on gasoline demand, which has been rising in response to falling pump prices. In theory, refiners pass on the increase in their dollar-denominated crude purchasing costs at the pump. But Chinese pump prices are set by the government as a netback from crude prices, so they are likely to continue falling rather than rise.

Spot prices for gasoline and diesel are some 20pc lower than they were a year ago and retail prices are 19pc lower. The 2pc drop in the value of the yuan against the dollar makes relatively little difference to drivers in terms of its effect on gasoline pricing.

But by giving a boost to China's ailing manufacturing sector, Beijing does appear — indirectly — to be fostering demand for diesel. Diesel demand growth has dramatically underperformed relative to gasoline this year, rising by 5pc compared with an 11pc increase in gasoline demand in January-June. The road haulage sector is the largest consumer of diesel in China. A boost for the competitiveness of goods exporters is likely to lead to an increase in their shipments of goods between factories and ports.

And that, perhaps, is the real message to take away from the PBoC revaluation: that the government is responding to economic slowdown by revitalising the same sectors responsible for the Chinese economic miracle of the 2000s — manufacturing and construction. It has, for several months now, been seeking to boost economic activity by hastening planning approvals for infrastructure projects — as it did in 2008-09, in response to the to the global financial crisis.

This appears to be borne out in changes in gasoline and diesel refining margins. The latter have risen to $2.60/bl from 39?/bl in July; gasoline margins have weakened to $1.65/bl from $4.67/bl.