China’s devaluation of yuan to hurt import-reliant emerging markets
What you need to know:
China has weakened its currency by a further 1.9 per cent in order to boost exports and take it a step nearer to becoming an official reserve currency, a move that has stunned the global financial market.
Regional economies which rely heavily on the imports from China may face widening current account balances due to increase in imports.
Economies like South Africa and Nigeria are set to be one of the biggest losers. South Africa, Nigeria, Ghana, Zimbabwe, Mauritius and Zambia have already joined a growing list of countries in Africa and the world using the yuan in their trading.
China’s devaluation of its currency is set to have massive effects on the regional economies that largely depend on the former for imports.
In the past week, China has weakened its currency by a further 1.9 per cent in order to boost exports and take it a step nearer to becoming an official reserve currency, a move that has stunned the global financial market.
Lately, East Africa has become one of Beijing’s biggest trading partners and the devaluing of its currency will have both positive and negative effects on emerging markets, with loan repayments, infrastructure development costs and manufactures being top among those to be affected.
China’s exports into Kenya rose to $919 million as at June from $652.4 million in the same month last year. Uganda’s 2014 trade with China reached $641 million while Tanzania’s stood at $754 million.
Mercyline Gatebi, an analyst at Genghis Capital said that China’s yuan devaluation may result in increased imports inflow into country’s like Kenya which rely on capital goods and machinery from these economies.
“This will benefit East African markets as a portended increase in government revenue may arise from import duties as we are able to acquire the goods at cheaper rates from what our local producers are offering,” Ms Gatebi explained.
“This will result in stiffer competition to our local industry manufacturers who may not be able to lower the cost of their goods. This may adversely affect the economic growth of our economies especially those that are more import-reliant.”
Regional economies which rely heavily on the imports from China may face widening current account balances due to increase in imports.
A possibility of a decline in purchasing power for the Chinese people may result in a drop in the tourist numbers from China who visit the regional economies year-on-year, which could down any revenues from tourist activities.
The devaluation is also expected to hit the local manufactures the most because the region has become dependent on raw materials from China.
“We will start seeing the infiltration of cheaper imports from China because a weaker Yuan favours their export market,” said Ms Gatebi. “This might come in at the expense of what is being produced locally hence hurting the local manufacturers in the region.”
Some of the major imports from China into the region are textiles, medicines, machinery, automobiles, electronics, construction equipment and solar equipment.
The biggest worry in the immediate future is what is likely to happen in the global economy as a whole and not just Kenya.
Francis Otieno, an economics lecturer at Kenyatta University said that the immediate impact of the devaluation of the Yuan cannot be seen or measured, but countries that have taken steps to transact in Chinese money could see pressure on their own local currencies.
“For those countries that have been holding Yuan as foreign currency reserves will have exposure because their values will drop, while other countries will have limited exposure as they still price their goods in American dollars,” said Mr Otieno.
Economies like South Africa and Nigeria are set to be one of the biggest losers. South Africa, Nigeria, Ghana, Zimbabwe, Mauritius and Zambia have already joined a growing list of countries in Africa and the world using the yuan in their trading.
“Nations which have part of their foreign currency reserves in the yuan may resort to propping up their reserves to reach their targets because the currency devaluation will deplete the value of their reserves, or else consider to shift their reserves to other currencies which are more attractive.
