Too soon for Tai­wan to re­joice over fall of yuan

The China Post - - COMMENTARY -

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.

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