Too soon for Taiwan to rejoice over fall of yuan
China cut the yuan’s value against the greenback on Wednesday after an abrupt 1.9-percent devaluation on Tuesday, taking total reductions from this week to 3.5 percent. It is the largest devaluation since the 1990s when China inaugurated its modern foreign exchange system and cut the yuan by 33 percent in a single stroke.
There are many questions that can’t yet be answered, including whether the currency is set for further falls. Economists are also debating whether the devaluation is a sign of China’s anxiety over slumping exports — which fell over 8 percent year-on-year in July — or if it is the move of the world’s greatest economy experimenting with its financial system ahead of ambitious multinational policy goals.
Importantly for Taiwan, which shares close financial ties with China, the question remains whether the depreciating yuan will do more good than harm.
Taiwan’s exporters are optimistic. China’s sliding currency has sent most Asian currencies into a tailspin, with the New Taiwan dollar tumbling against the U.S. dollar to a five-year low on Tuesday.
Business leaders have hailed the currency fall, saying that in the near future exports may be able to benefit from goods that appear cheaper on the international open market.
“The depreciation of the (New) Taiwan dollar against the U.S. dollar will be healthy for Taiwan,” said Lai Cheng-yi (
), head of the General Chamber of Commerce of the Republic of China ( ).
A New Taiwan dollar drop may buoy exports, which have performed poorly for months, sliding 11.9 percent year-on-year in July to mark the sixth consecutive month of contraction. As long as China continues to devalue its currency, Taiwan’s unit should follow.
But so too should the Japanese yen and the Korean won, and Taiwan’s advantage will hold only as long as it is ahead in the currency war with its two East Asian neighbors, with which it strenuously competes to sell the same types of goods to the global market.
This week Shen Kuo-jung ( ), vice chairman of the Allied Association for Science Park Industries (
), called for Taiwan’s Central Bank to intervene further and allow depreciation to NT$34 against the U.S. dollar.
Carl Huang ( ), secretary-general of Taiwan Machine Tool and Accessory Builders’ Association (
), proposed NT$36 against the greenback but said that even this may be too little too late.
Leading economists have said that the continual weakening of the New Taiwan dollar may not drive up export volume sharply and serve only to drive away investment from Taiwan.
Fubon Financial Holding ( ), which lost 6.87 percent to end at NT$52.90 on the local bourse on Wednesday, has said the fall of the yuan and a serial depreciation of the New Taiwan dollar could lead foreign investors to move funds out of the country.
As far as the consumer is concerned, the depreciation of the New Taiwan dollar may also be bad news. A weak local currency translates to expensive imports and Taiwan, a country with few natural resources, is particularly vulnerable to these adjustments. The rising cost of raw materials is likely to prompt inflation and send the cost of household goods soaring.
For now, it is too early to weigh short-term gains of the yuan drop against the drawbacks, as this impact will hinge on the extent of the devaluation. What is clear today is that Taiwan’s economy cannot rely on a weak currency to rescue exports. Currently, the lion’s share of Taiwan’s offshore investment is based in China; China and Hong Kong are also Taiwan’s main export destination. As China’s economic growth slows and its demand for overseas goods shrinks, Taiwan needs to restructure quickly to reduce its trade dependence.