Fall in yuan value hits Southeast Asia

For China and its slowing economy, a cheaper currency could be a boon, as it makes the country’s exports cheaper.
China reported an 8.3-per-cent year-on-year drop in exports in July, surprising economists who were expecting a much milder decrease of less than 2 per cent. That decline comes amid slowing economic growth, which could hit 7 per cent this year.
The sharp drop in the value of the yuan also had a visible impact around the region, particularly on the economies and currencies of Singapore, Malaysia, and the Philippines.
In a surprise move on August 11, the People’s Bank of China, the central bank, lowered the yuan’s daily reference rate – the middle line around which the currency is allowed to trade by 2 per cent up or down – by 1.9 per cent against the dollar.
The PBOC did this by changing the way it sets the value of the currency, shifting away from using a reference rate set from the values over the previous 10 days to using the value set at the close of the previous day.
The result of the shift was the sharpest one-day drop since 1993. The yuan fell another 1.6 per cent the next day and 1.1 per cent the day after. It was not until August 14 that the currency finally firmed up, at 6.39 yuan to the dollar.
Other currencies across the region followed suit.
“The (exchange rate against the dollar of) Southeast Asian currencies has fallen more than that of the Chinese yuan,” says Jayant Menon, lead economist at the office for regional economic integration at the Asian Development Bank (ADB). “We’ve seen quite a few (currencies) that were affected.”
Southeast Asian currencies had already been hit hard this year as the dollar strengthened and economic growth slowed. Imports have dropped and the expectation that interest rates will finally start increasing in the United States is sending capital back there and out of Asia.
The drop in the value of the yuan makes Chinese exports more competitive. Other countries have had to follow suit to stay competitive themselves.
The baht, for example, fell 0.8 per cent around the same time to a six-year low of 35.36 to the greenback. The Singapore dollar fell as much as 1.4 per cent to a five-year low. The Philippine peso also fell hard to 45.86 per US dollar.
The devaluation of the yuan has been a factor in pushing two other Southeast Asian currencies, the Indonesian rupiah and the Malaysian ringgit, down from already depressed levels.
On Aug 17, the rupiah dropped 0.4 percent to close at 13,821.8 to the dollar. The ringgit fell 0.7 percent to close at 4.0995 to the dollar. Both hit their lowest levels against the dollar since the Asian financial crisis in 1997.
The rupiah has been weakening since the end of 2011, and the drop of the yuan finally took it to a new low. The Indonesian government and central bank have tried to lift the rupiah in the past few weeks.
Last month, the government said it would raise import tariffs to encourage domestic purchases across more than 1,000 different items such as clothes, food and cars. Meanwhile, Bank Indonesia, the country’s central bank, banned foreign currencies in domestic transactions.
These moves aim to reduce the use of foreign currencies in Indonesia.
The downward move in the yuan value is also putting pressure on the Singapore dollar, probably more so than other currencies, because it is often seen as a proxy for the yuan, given the close links between the two countries.
“For the Singapore dollar, the yuan makes up a large proportion of the currency’s trade-weighted basket, so further moves in the yuan will also have a considerable effect,” Andrew Wood, head of Asia country risk at BMI Research, tells China Daily Asia Weekly.
“For the Malaysian ringgit, which has sold off more aggressively than the other two currencies, it is probably more of a temporary shock.”
Increased drops in the value of the Chinese currency could further hurt other economies in the region.
Andrew Colquhoun, senior director of Asia-Pacific sovereign ratings at Fitch Ratings, said in a note on August 12 that a more substantial devaluation of the yuan would add to the economic challenges currently being faced by Asia-Pacific countries.
“It could potentially broaden the impact from China’s now-expiring real estate boom for those economies that are more exposed to Chinese consumption including major commodity exporters such as Australia and Indonesia,” he noted.
“It could also see more ‘onshoring’ of activity back into China and dash some of the hopes of some economies to pick up some of the manufacturing investment that was starting to find China too expensive.”
The drop in the value of the yuan will also affect almost every industry.
For example, automakers General Motors and Volkswagen could take a hit. About half of GM’s income comes from China, so the company could be severely affected by a weaker yuan when it converts its Chinese earnings into US dollars. Volkswagen, which derives about a third of its revenue from China, faces similar losses.
The mining industry is no exception. The stock prices of companies like BHP Billiton, Fortescue Metals Group and Rio Tinto all took hits, since a weaker yuan will make imports of raw materials into the country more expensive. This could exacerbate the impact of slowing growth.
Luxury retailers could be hit the hardest hit by the yuan devaluation. LVMH, which controls Louis Vuitton, earns about 15 per cent of its income from China. Others like Burberry and shoemakers Tod’s and Salvatore Ferragamo have seen sharp drops in share prices in expectation of weaker growth in China.
Tourism could also be affected. The drop in the value of the yuan may make travel out of China more expensive. Deutsche Bank, for instance, warned in a note that a prolonged decline in the yuan would make outbound tour packages more expensive.
The Chinese mainland accounts for 20 to 80 percent of inbound tourist arrivals to Hong Kong, South Korea, Thailand and Taiwan.
The PBOC said the goal of the adjustment was to align the value of the currency with market valuation. Pressure on the currency had been mounting since mid-July, when the yuan was effectively pegged to the dollar rather than against a basket of currencies.
“The main reason was probably that downside pressure had been building on the currency for some time now,” Wood of BMI Research says. “The central bank was burning through reserves having to support the currency at that level.”
For the time being, similar drops in the yuan are unlikely.
Zhang Xiaohui, assistant to PBOC Governor Zhou Xiaochuan, said on Aug 13 that there is no basis for continuing the depreciation of the yuan in international financial situations. “The PBOC is capable of keeping the currency at a relatively stable and balanced level,” he added. Ultimately, the drop in the value of the currency could be a good one for China.