How a strong Yuan may affect Kenyan consumers

Kenyan consumers may be headed for a period of pricing turbulence as the economy adjusts to a much stronger Chinese currency whose peg to the dollar has been a key anchor against global inflation.

The Bank of China on Saturday announced that it was ditching the policy of pegging the Yuan against the dollar, ending nearly four years of a trade spat with the US and Europe and buoying stock markets around the globe.

Economists said appreciation of the Yuan could have far reaching effects on Kenya, raising the cost of Chinese imports and increasing the public debt burden.

“This new policy means that China will allow market forces to determine the direction of the exchange rate,” said John Akoten, an economist.

“A better priced Yuan should raise the cost of Chinese goods, erode their competitiveness in foreign markets and allow our manufacturing sector to compete,” said Mr Polycarp Igathe, the managing director of Haco Industries.

Economists however warned that the pricing relief for local manufacturers could be short lived.

“A flexible Yuan could disrupt the flow of trade between Kenya and China as the cost of capital goods imports that are mostly dollar-denominated rises, pushing up the cost of production in Kenya and eroding all the possible gains in consumer market,” said Dr Samuel Nyandemo, a senior lecturer of Economics at School of Economics University of Nairobi.

Dr Akoten reckons that any substantial loss in business could see Beijing take deliberate steps to reduce the price margins for Chinese goods to retain the market share.

Other possible lines of action for China include offering subsidy to manufacturers to increase their competitiveness in the global market.

The biggest loser in Beijing’s currency policy change could however be government, which will bear a heavier debt burden should the Yuan appreciate significantly.

A strong Yuan means Treasury will need more dollars to service the Chinese debt – especially because most of the debt is dollar -denominated and it will take more dollars to buy the Yuan.

The Yuan has been pegged to the dollar at the rate of 6.83 since 2008 a move that has soured relations between China and its biggest trading partners – the US and European Union.

Little change in the balance of trade is expected because the volume of Kenya’s imports from China is set to continue growing in the medium term bending the tilt in favour of the Asian nation.

“The balance of trade will continue to be in favour of China as we import more from them than we export,” said Judd Murungi, the head of research at CFC Stanbic Financial Services.