By Siah Hwee Ang*
On August 11 the Chinese Yuan (Renminbi) dropped in value by about 2%, pushing the Chinese stock market woes and the standoffs at the Trans-Pacific Partnership negotiations out of the headlines.
This is yet another example of tinkering exercised by the Chinese government in an effort to test the resolve of the operation of a market economy, and the marketisation of its currency.
The People’s Bank of China (PBOC) suggests that the adjustment made to the value of the currency was due to the new method of calculating the daily price of the currency. It could also be seen as China’s attempt to make its currency more attuned to the expectation of being included in the International Monetary Fund’s (IMF) basket of reserve currencies, Special Drawing Rights (SDRs).
In the aftermath the 2% drop was considered significant given that the Yuan was trading within a 0.4% band over the last four months.
This was followed by another similar drop on August 12. There are suggestions that China has “devalued” its currency to boost exports, to ensure that its economy does not experience the expected slow down. Currencies of other major export economies immediately followed suit, to remain competitive with the world’s second largest economy. Businesses have also been affected as a result of this major shift.
For example, the Taiwanese iPhone assembler Foxconn earns US dollars from customers like Apple Inc. and will benefit from cheaper labor costs in China. However, companies that pay US dollars are likely to lose out on this fluctuation. Further, industries such as the Chinese iron and steel industries, which have been suffering from overcapacity, will be able to use this window of opportunity to boost their exports.
Currencies in countries that view China as a significant investment and trade location also fell. These countries include New Zealand and Australia. This mirroring movement needed to happen, to avoid New Zealand’s exports becoming more expensive for Chinese buyers. International education and tourism from China into New Zealand could potentially be affected as well.
While one can see why the currency adjustment was necessary, it did come with some costs for China as well. Effects are likely to be felt by Chinese companies that import commodities and raw materials. Domestic consumption, strongly encouraged as part of China’s reform, might be slightly hampered due to more expensive imports. From the standpoint that China is moving from an export-oriented economy to an investment-oriented one, this is another step backward.
But presumably exporting will always be a good fallback plan. Nonetheless, for currency reform, this is a step forward. This currency adjustment event is another example of the central role that China plays in the world economy at this time. After all, it is the largest trading partner to more than 140 countries in the world. Countries highly dependent on China for trade also see their currencies falling the most, for example South Korea, Vietnam and Malaysia. As some of the media headlines have reported – “when China sneezes everyone gets a cold”.
Many expect the “devaluation” to go slightly further, gradually. But we will wait and see. In a more global sense, we have been hearing discussions about the globalisation of the Yuan, and the timeframe and extent to which it will happen.
Regardless of whether the Yuan will be included in IMF’s basket of SDRs in November, based on the impact of last week’s events, I would say that the Yuan has been globalised.
*Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here.