Examining into China’s Yuan devaluation and ASEAN

After China’s central bank devalued the yuan by nearly 3% against the US dollar for the third time in three days, it was finally eased on Friday (14 October 2015) after yuan was raised against the US dollar by 0.05%.This may signal that the rows of aggressively weaker fixings has ended for now.

The main argument of this recent ‘managed float approach’ has been to counter China’s strengthening of yuan and its corresponding weakening of trade globally. It is worth noting that Industrial production, investment and retail sales data for July 2015 were weaker than expected, while at the weekend figures showed Chinese exports tumbled 8.3% in July, their biggest drop in four months. After a string of weakening output growth figures going back to last year, the authorities have come under intense pressure internally to address the slowdown with a dramatic policy shift.

A teller counts yuan banknotes in a bank in Lianyungang, China, August 11,

A teller counts yuan banknotes in a bank in Lianyungang, China, August 11,

Though the Chinese Government has stated the recent move as one-off,  this created unease amongst China’s major trading partners or exporting countries and regions, which has been China’s main traditional competitors. Here the immediate logic is – China’s devaluation will lead to lower yuan value which could boost China’s export but reduce the usage of the currency worldwide.

Countries in ASEAN is worth examining within this context as this region has been China’s major competitor for exports and destination for yuan’s expenditure.

Singapore will be one of the most vulnerable to a decline in the yuan as their exporters have the highest exposure to China in Asia, according to Barclays Plc, Standard Chartered Plc and Mizuho Bank Ltd. Mr Song Seng Wun, an economist at CIMB Private Banking suggest “We will definitely see downward pressure in, say, the Purchasing Managers’ Index readings on new orders and new export orders, which, in turn, will have an impact on Singapore production and export figures,”

The yuan’s devaluation would likely add further woes to Malaysia’s ringgit. Apart from creating intense competition for Malaysian exports, Chinese devaluation of yuan will further destabilize investor’s confidence on Malaysia’s economic performance specifically on its exports and trade balances. The ringgit has slumped 13 percent in 2015 as the oil-exporting nation grappled with weak crude prices and a political turmoil involving the main leadership in the country. Equally Malaysia closest neighbor – Indonesia- has its rupiah declined to 10.5 percent.

As for other ASEAN countries such as Cambodia – the concern is on the country’s extreme reliance on US dollar usage. This would be bad for Cambodia as  it means that it cannot devalue its own Riel. Secondly, Cambodia risks pricing itself out of the market as a result of the rapid rise in wages, especially in the countries key garment industry that has not been matched by increases in productivity.

Chinese tourist numbers could also be impacted with yuan devaluation  as it would make foreign travel more expensive especially to ASEAN countries, which has been the natural destination for tourism such as Thailand, Indonesia, Philippines and emerging tourist market in CLMV countries.

The devaluation of yuan also couldn’t come at a worse period given the potential decision from the US Fed’s to increase its interest rate in the future. This in-turn will likely further reduce FDI in ASEAN countries with foreign investors being slightly more picky in selecting markets.

Taking all the burgeoning external economic problems faced by ASEAN, it is no surprise that analyst has also previously predicted on the likely of currency war. Each country will soften up their currencies to push respective exports abroad. Nikkei Asian Review on August 12 reported the phrase “currency war” which started to gain traction among Southeast Asian market players after the devaluation. However, with the latest move by the Chinese Government to increase yuan’s value to a 0.05% against US dollar, this theory is quashed – at the moment.

However the deeper lesson is – the devaluation of yuan has definitely raised the panic threshold among major currencies in Southeast Asia in looking for options to mitigate any impact.

This has not been the first time and neither it would be China’s lasts in terms yuan devaluation. Apart from creating the immediate problems to ASEAN as witnessed recently, other far-reaching socio-economic consequences including the dramatic decrease in the domestic economic performance is to be expected.

From a long-term perspective, perhaps there is a need for ASEAN to continue seriously with its single currency/ economic union project. This could be one of the possible measures to soften drastic fiscal actions by economic giants such as China and the US to the region. Here the reliance of Southeast Asia as a single economy and currency could help not only in mitigating immediate financial impact but also raise the confidence level of foreign investors on the robustness of the system and reduce any panic factor – which has the potential to plunge a single state economy overnight – The Asian Diplomat.

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