Yuan devaluation threatens industries, good for imports

China’s surprise move to devalue the yuan this week is a double-edged sword likely to hurt local manufacturers though reducing the cost of consumables.

Some analyst on top fear the devaluation may herald downturn of fortunes for the Orient economy that may cut project financing for Kenya and Africa.

China’s move has seen the tightly controlled yuan fall by nearly four per cent to a three-year low against the dollar, putting stock markets around the world, commodity prices and emerging market currencies under pressure.

The cheaper China imports, while reducing expenses for Kenyan consumers, could pile pressure on an already growing current account balance recently driven by capital goods’ imports rather than consumer goods now expected to become cheaper.

Analysts say there is likely to be ramifications for commodity-reliant African economies if the devaluation is a sign of an ailing Chinese economy.

“China’s devaluation will bring on a two-pronged effect on the economy. First, cheaper imported goods from China will negatively affect the local manufacturing industry, adding pressure on industries to make their prices more competitive relative to imports, and in a scenario of greater imports, the country’s current account balance is likely to be further affected,” said Genghis capital analyst Vinita Kotedia.

“On the other hand, government revenues are likely to improve bearing in mind the new revision in import duties.”

Due to Kenya’s relatively underdeveloped manufacturing sector, the country imports from China goods such as electrical appliances, textiles and transport equipment.

Kenya National Bureau of Statistics data shows that the value of China’s exports to Kenya for the first four months of this year rose to Sh93.6 billion from Sh63.6 billion in a similar period last year.

India, which has been the largest seller of goods to the local market since 2011, was second on Sh80.6 billion, down from Sh84.5 billion last year.

According to CfC Stanbic economist Jibran Qureishi, the effects of the devaluation of the yuan would eventually have an impact on Kenya, though not straight away.

“Countries like Zambia (copper) and Angola and Nigeria may stand to lose a lot more than us as it will effectively become more expensive for China to buy their commodities and dent their export earnings,” said Mr Qureishi. “Arguably, tourism from China as a source market has risen in recent years, but this isn’t likely to sway either way given insecurity concerns we have been facing.”

In terms of non-trade finance, Kenya benefits heavily from Chinese funding of infrastructure projects, such as the standard gauge railway and construction of roads.

Mr Qureishi, however, said the long-term concern not only for Kenya but for Africa would be that China’s appetite for infrastructure projects in the region would soon decline.

Ms Kotedia said Kenya is likely to benefit from the devaluation as interest payments on any yuan-denominated concessionary loans would become cheaper with a weaker Beijing currency.