Hong Kong - The lower-than-expected economic growth figures from China, along with the volatility in its stock markets and depreciation of the yuan have in turn impacted other Asian currencies.
“Among emerging market currencies, Asian currencies face the greatest downward pressure from the (yuan) depreciation due to their large economic interdependency with China,” says Mitul Kotecha, head of foreign exchange and rates strategy in Asia at Barclays in Singapore. “The weakest performer is the Malaysian ringgit.”
These issues and concerns have put significant pressure on currencies across the region. The currencies of Indonesia, Taiwan and South Korea, which are big exporters to the Chinese mainland, have all suffered.
Indonesia, the largest economy in the Association of Southeast Asian Nations, has seen its rupiah drop to lows it has not seen in a couple of decades. The depreciation has been steady for a couple of years and accelerated over the past month. Indonesia’s already-foundering rupiah decreased to a low unseen in 17 years.
One US dollar bought 12,710 rupiah, similar to the level seen during the Asian financial crisis in 1997.
Indonesia, which flew high in the past decade but relied heavily on its exports, has also been hurt by the rupiah’s fall and weak demand in its key markets, as well as by economic growth that has hit a five-year low since last year. The Indonesian government has tried very hard to lift the rupiah.
In July, the government decided to raise import tariffs on more than 1,000 consumer goods, including clothes, food and cars, to encourage Indonesians to buy local goods in rupiah and spend less on imports.
In the much more developed industrial powerhouse of South Korea, the won fell by 11.7 won to 1,190.8 won against the greenback. Again, the level was the lowest in several years, in this case since 2011, and it put the government there on high economic alert.
“We are keeping close tabs on the movement of the currency market,” South Korean Finance Minister Choi Kyung-hwan told local media. “The Chinese currency (depreciation) increased the won’s volatility.”
But it was the Malaysian ringgit that was most affected, falling 1.79 percent to 4.26 ringgit against the US dollar on Aug 24, dubbed Black Monday, hitting lows not seen since the Asian financial crisis of 1997. The currency then dropped in the following days by 10.9 percent against the dollar.
The hard hit is not surprising. Three kinds of currencies have been hurt most: Currencies of countries with a high degree of third-country export competition with China, those with a relatively high export share to China and commodity exporters. Malaysia falls in two of these three categories.
China has been Malaysia’s biggest trading partner since 2009, with the total trade between the two countries hitting $106 billion last year; and with imports nearly 12 percent of all Malaysian export products, China is also the second biggest export market after Singapore in 2014.
“Malaysia has been affected in particular, because unlike other Asian economies, which are commodity importers and can benefit from the decline in global commodity prices through lower import costs, it relies heavily on commodity exports,” says Barclays strategist Kotecha.
A weakening currency and slowing economy in Malaysia has raised concerns for its neighboring country, Singapore.
“We are the biggest investor in Iskandar Malaysia and so any trouble there is a serious issue for us,” said Singapore’s Foreign Affairs Minister K Shanmugam on Aug 27.
The Southeast Asian country too has had its share of headaches.
The Singapore dollar weakened to a five-year low against the US dollar, falling nearly 1 percent to S$1.415 per US dollar, following the Chinese central bank’s depreciation announcement.
It is, analysts say, among a handful of currencies seen as being more sensitive to China’s foreign exchange policy, compared to other currencies in the region.
“The Singapore dollar will weaken further,” notes Kotecha. “Singapore is a very trade-driven economy and the slowdown in Chinese growth, stronger US dollar and a weaker yuan will put pressure on the Singapore dollar.”
If there was one winner in the region, it was the yen. Surrounded by volatile Asian currencies, the lower-yielding yen is often seen as a haven for the risk averse and benefited from its reputation for stability, making some gains from the flight to safety away from other Asian currencies. These gains might be temporary, however.
“The yen is benefiting from safe-haven demand and is the strongest Asian currency since (the yuan’s depreciation), but we do not expect this strength of the yen to persist,” says Kotecha.
Japan’s large trade weighting with China, and East Asia more broadly, may be directly related to changes in China’s exchange rate, growth and inflation profiles, according to a recent Barclays report, which raised its six-month US dollar to yen forecasts to 127 from 123.
Although the yen has performed well in the last month, the upturn comes after a couple of years of steady declines as a result of government stimulus and quantitative easing.
While it might be tempting to suggest that this widespread downward trend of the regional currencies is a direct result of China’s influence, this view might be somewhat disingenuous.
Even though the low levels for most currencies in the region were generally seen after the downward adjustment of the yuan, economists and analysts say there are a number of complex drivers behind the weak currency performance across the region.
“I would not blame everything on China,” says Kotecha.
“The souring in sentiment for emerging Asian currencies has been observed even prior to China’s (yuan) depreciation. Asian currencies were under pressure due to the expectation of the US interest rate hike.”
At the same time, Kotecha adds, commodity prices have been weakening, which has a strong impact on emerging markets in general.”
Looking forward, analysts see no turning point for the weakening Asian currencies though the depreciation might slow down in the near future.
“China’s growth is still slowing and commodity prices are weakening. I think all of these factors are still adding some pressure on Asian currencies,” says Kotecha.
“The uncertainty now is how weak China’s economy will be and therefore I think we will still be cautious about Asian currencies in the next few months. We still expect to see depreciation.”
Though countries in Asia are vulnerable from the weakness in China’s economic growth, the forex strategist adds, the type of vulnerability on the region has changed.
“Even in Malaysia, the fundamentals are much better than what was observed in the past, despite the drop in forex reserves, with current account dynamics remaining supportive,” Kotecha says.