Who’s afraid of a fall­ing Yuan?

The Pak Banker - - OPINION - Christo­pher Bald­ing

EV­ERY­ONE from but­toned-down Ja­panese cen­tral bankers to ex-slug­ger Jose Canseco (or who­ever hacked his Twit­ter ac­count) seems to be wor­ried about the slid­ing value of China's cur­rency, the yuan. The fear is that a cheaper yuan will spur other ex­port-de­pen­dent coun­tries to de­value as well in or­der to re­main com­pet­i­tive, spark­ing a global cur­rency war. Mean­while, or­di­nary Chi­nese will pre­sum­ably race to move their money out of the coun­try and Chi­nese com­pa­nies will strug­gle to pay back loans taken out in dol­lars. A truly un­con­trolled dive threat­ens to cause havoc through­out China's opaque fi­nan­cial sys­tem. Such fears are overblown. The true im­pact of a fall­ing yuan is likely to be both more nu­anced and more lim­ited in na­ture. At the most ba­sic level, a fall­ing cur­rency raises the prices of im­ported goods and low­ers the prices of ex­ported goods. De­mand for and con­sump­tion of im­ports should de­cline as they be­come more ex­pen­sive, while ex­ports re­ceive a boost. That's the model China used for decades to power its eco­nomic boom. Most other coun­tries, in­clud­ing the U.S., have tra­di­tion­ally fa­vored a strong cur­rency that raises the do­mes­tic stan­dard of liv­ing vis-avis the rest of the world.

China, too, says it now fa­vors a sta­ble yuan and has been spend­ing bil­lions each month to buy up the cur­rency to bol­ster its value. There would ap­pear to be two dan­gers: first, that the ef­fort fails in the face of con­certed down­ward pres­sure from the mar­kets; or se­cond, that China it­self de­cides to de­value in or­der to re­vive its ex­port-fo­cused man­u­fac­tur­ing sec­tor. Yet how bad would that re­ally be? Chi­nese com­pa­nies are mov­ing quickly to pay off or re­struc­ture their dol­lar loans. As for con­sumers, it's im­por­tant to re­mem­ber that large coun­tries such as China trade less than small coun­tries in rel­a­tive terms. Thus they're bet­ter in­su­lated against a rise in the price of im­ports. (Im­ports com­prise only about a fifth of Chi­nese GDP.) Ad­di­tion­ally, not all the prod­ucts coun­tries im­port are equally price-sen­si­tive. Ma­chin­ery, me­tals, min­er­als and chem­i­cals make up about 60 per­cent of Chi­nese im­ports. Add in pre­ci­sion equip­ment such as watches and med­i­cal devices, pre­cious me­tals, trans­port and rubber prod­ucts and the pro­por­tion rises to nearly 90 per­cent. Price af­fects but doesn't fi­nally de­ter­mine de­mand for most of th­ese goods. Chi­nese com­mod­ity im­ports are likely to con­tinue de­clin­ing, but more be­cause of the over­ca­pac­ity cre­ated by a surge in in­vest­ment af­ter the 2008 global fi­nan­cial cri­sis, rather than any­thing to do with the yuan.

The sheer vol­ume of Chi­nese ex­ports means the coun­try does have anout­sized im­pact on world mar­kets. Yet Chi­nese ex­ports re­main dom­i­nated by elec­tron­ics and gar­ments. Base metal pro­cess­ing and mis­cel­la­neous man­u­fac­tur­ing bring the pro­por­tion up to al­most 70 per­cent of to­tal ex­ports. Th­ese are, de­spite talk of mov­ing up the value chain, still low-wage and low-skill sec­tors. The coun­tries that will feel the most pain -- low-wage na­tions such as Bangladesh, Viet­nam and In­done­sia -- rep­re­sent a rel­a­tively lim­ited sub­set of the global econ­omy. While China's re­cently raised its shareof global cloth­ing ex­ports at their ex­pense, the world's big­gest economies have much less to fear. The lat­ter no longer make the kind of ba­sic man­u­fac­tured goods that dom­i­nate Chi­nese ex­ports, at least not in large quan­ti­ties. To take one ex­am­ple, China re­ceived $459 per ton of ex­ported steel in De­cem­ber but paid $1,023 per im­ported ton. Why the dif­fer­ence? China is ex­port­ing low-qual­ity steel but im­port­ing more valu­able, spe­cialty prod­ucts. Ja­pan, the U.S. and South Korea hold dom­i­nant po­si­tions in the lat­ter fields.

Nor would a fall­ing yuan nec­es­sar­ily gen­er­ate a wave of global de­fla­tion. Core price de­fla­tion in ar­eas such as en­ergy, com­modi­ties, and food has more to do with in­creased pro­duc­tiv­ity and over­in­vest­ment out­side of China than it does with yuan pol­icy. If de­clines in the dol­lar af­ter the 2008 cri­sis and the yen more re­cently didn't spur world­wide de­fla­tion, there's no rea­son to think a fall in the yuan would now. Be­fore wor­ry­ing about what China does or doesn't do with its cur­rency, other coun­tries should set their own houses in or­der. Af­ter 2008, the world econ­omy re­vived on the back of a Chi­nese con­struc­tion boom that drove up com­mod­ity prices and in­vest­ment. Now that China's slow­down has been ev­i­dent for at least a year, com­pa­nies would be well ad­vised to start plan­ning for a "new nor­mal" of slower growth and in­vest­ment, as well as a mod­er­ately weaker yuan. If the rest of the world wants China to join the global econ­omy, they have to be will­ing to treat the coun­try the same as any other. It's a bit rich for na­tions such as Ja­pan, which has al­lowed the yen to plum­met against the dol­lar, to sug­gest that China should im­pose hard cap­i­tal con­trols to pre­vent the yuan from slid­ing. If the mar­ket thinks the Chi­nese cur­rency is over­val­ued, it should be al­lowed to find its fair level. It won't be the end of the world.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.