Depreciation's effect limited

Blow to european exports expected to be short term, experts say

European business leaders and experts say that while the renminbi's depreciation puts pressure on European exports in the short term, it won't affect them in the long term.

The Chinese currency continued to fall on Aug 13 after the central bank reformed the exchange rate formation system to better reflect the market.

The central parity rate of the renminbi, or yuan, weakened by 704 basis points, or 1.1 percent, to 6.401 against the US dollar, narrowing from 1.9 percent on Aug 11 and 1.6 percent the next day, according to the China Foreign Exchange Trading System.

It fell for three days in a row after the People's Bank of China cut the yuan's reference rate against the US dollar to 6.2298 on Aug 11, a move to make it more reflective of market forces.

The central bank stressed that the Aug 11 depreciation was a "one-off" move to fix the discrepancy between the reference rate and the market's spot rate. The spot rate has been consistently higher by about 1.5 percent since June. The currency can fluctuate by as much as 2 percent a day.

The International Monetary Fund described the Chinese central bank's move as "a welcome step" that allows market forces to have a greater role in determining the exchange rate.

Although the yuan stemmed its worst loss in almost two decades, "there is no basis for the depreciation to persist, and the central bank will step in when the market is distorted", People's Bank of China Assistant Governor Zhang Xiaohui said at a news briefing in Beijing on Aug 13.

Yi Gang, vice-president of the central bank, says the adjustment spurred by the Aug 11 change in how the PBOC determines the yuan's daily reference rate is "basically already completed", adding that China will respect the market while letting the government play its role.

Rain Newton-Smith, the Confederation of British Industry's director for economics, tells China Daily: "This move to allow the renminbi to drop a little could help support Chinese growth against the backdrop of an unexpectedly sharp fall in the country's exports in July." The CBI is the United Kingdom's top business lobbying organization.

"Although a depreciation in the renminbi against the sterling will put pressure on UK exports to China in the short term, the effect on Chinese growth should be beneficial to UK exporters over the longer term," she says.

This opinion is echoed by Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders. "While the devaluation of the Chinese currency could put pressure on exports in the short term, the UK automotive industry is in a unique position to tackle any challenges with its diverse, competitive range of products, which are exported to more than 100 countries worldwide," he says.

"In the long term, any boost for the Chinese economy is likely to have a positive effect on exports."

China has developed into a major export destination for UK-built cars. "The country's economic growth, coupled with increasing demand for high-quality British premium vehicles, has seen UK car exports to the country increase sevenfold since 2009," Hawes says.

Francois Godement, head of the European Council on Foreign Relations' Asia Program, says the depreciation will make the Chinese market more attractive for European investors because the renminbi will become cheaper for them.

"They can already see the volatility in the market, but having the depreciation now will only make Chinese investment opportunities more attractive. But in the short term, there will be a negative impact for high-end exporters to China," Godement says.

The weaker renminbi makes imports more expensive, and shares fell over concerns about export demand for luxury goods makers.

Shares in Burberry, for instance, fell 4.4 percent in London on Aug 11 and 3.5 percent on Aug 12. The company has around 100 stores in the Chinese mainland, which account for about 14 percent of the company's sales.

The yuan's depreciation is expected to make Chinese exports more competitive while the price of imported goods probably will rise.

Ma Jun, chief economist at the central bank's research bureau, says that the central parity adjustment "does not mean a depreciating trend for the yuan".

"The economic fundamentals can support a stable yuan exchange rate, since China's 7-percent GDP growth is higher than most countries' and is especially higher than the other emerging economies with greater exchange rate fluctuations," Ma says.

A persistent export surplus, large foreign exchange reserves, low inflation, a moderate fiscal deficit and government debt will ensure a stable currency, he adds.

Miranda Carr, head of China thematic research at Espirito Santo Investment Bank, says that the Chinese government has made its financial markets more market-driven, and the devaluation came about as a consequence of market forces.

These pressures include the large capital outflow that China experienced, the slowing economy and the rising US dollar.

In addition, Carr says the PBOC is shifting to a more market-based system in order to comply with the International Monetary Fund's special drawing rights requirements.

"This means an end to the previous policy of propping up the currency in order to qualify for the SDR, which was becoming increasingly expensive, leading to further depreciation pressure on the renminbi, higher potential capital outflows, and greater competitive threats from Chinese exports and companies," she says.

Robert Davis, senior portfolio manager of Brussels-based NN Investment Partners, says the impact of the renminbi depreciation for European investors would depend on the motivation behind it.

On the one hand, the renminbi depreciation could be related to the IMF's desire to see a more market-based mechanism for calculating the daily "fix" foreign exchange level. If this is the case, Davis expects the currency move and its implications to be fairly modest.

At the other extreme, China could be using foreign exchange as an easing measure specifically to improve its export competitiveness, which is possible since recent export data have been so weak, he says.

"I think Chinese policymakers are aware of this, and so my expectation at the moment is that the devaluation is related to the IMF SDR issues and will be fairly limited. In either case, though, on a relative basis China is well-placed compared with its Asian and emerging market peers and particularly those that are commodity dependent, as this is also clearly bearish for commodity pricing," Davis adds.

Mao Lei, an assistant professor of finance at Warwick Business School, says that the depreciation shows that the Chinese government is not giving up on export revenue when making its 13th Five-Year Plan (2016-2020).

"Though it is not a good long-term solution for the country's slowing growth, to reach a good nominal GDP growth number for 2015, the Chinese government appears to be switching back to its old growth mode. Other emerging countries will feel the pressure," Mao adds.

David Dollar, a senior fellow at the Brookings Institution's John L Thornton China Center in Washington, says: "I think the 1.9 percent is too small to make much difference. I think that's why the key issue is where it goes from here.

"If it turns into a significant devaluation trend - significant would be 10 percent or more - that would have a significant effect on trade, but it would also generate a lot of tension between China and the United States."

Contact the writers through cecily.liu@chinadaily.com.cn.

(China Daily European Weekly 08/14/2015 page3)