There is no winner in renminbi depreciation

September 19, 2015 08:03
No matter what was the reason for China to devalue its renminbi, market expectations cannot be controlled. Photo: Bloomberg

An article published in the Financial Times on Aug. 31, Global Trade Damaged by Weakness in Emerging Market Currencies, has revealed a worrying trend — even after competitive emerging market currencies are devalued, neither export data nor market share figures show any substantial improvement.

Analyzing 107 emerging market currencies, the article points out that having a weaker currency did not lead to any rise in export volumes.

However, it did lead to a fall in import volumes of about 0.5 percent for every 1 percent depreciation of a currency against the dollar.

Coincidentally, Stephen Jen, a hedge fund manager and former economist at the International Monetary Fund, noted in an interview in mid-September that most of the countries that devalued their currencies have reported deficits in their current accounts.

The more they depreciate, the higher the possibility that they will suffer from worsening current account deficit.

The August figures of countries like Brazil, South Africa, Mexico, Australia, New Zealand, Singapore and Taiwan were used as examples.

A friend of mine, who is in the export business, told me that the current situation is even worse than the 2008 financial crisis.

Back then it was like an economic doomsday in the United States. Luckily, he managed to ease the impact through his exposure in South America and some other emerging markets.

However, orders from emerging markets almost evaporated this year. Even if the demand is still there, importers in those markets can’t afford to buying in US dollars. Meanwhile, the purchasing power of domestic consumers for overseas products has weakened.

Import and export are core components of global trade. When imports to emerging markets decline, it is certain the global economy will go down.  A similar situation appeared during the 1997-98 Asian financial crisis and the 2001-02 Argentina crisis.

If the renminbi depreciation were just a random choice to increase the currency's chance of being included in the IMF Special Drawing Rights basket, will the impact on the global economy be less?

The answer may be no. No matter what’s the reason behind the People’s Bank of China’s decision to devalue the yuan, when the trend of the exchange rate forms, it leads to an unstoppable market expectation.

If China sacrifices its foreign reserves to support the renminbi, the cost will be huge.

This article appeared in the Hong Kong Economic Journal on Sept. 17.

Translation by Myssie You

[Chinese version中文版]

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head of private banking and trust services at Hang Seng Bank