Weakening of yuan bad for SA exports, good for inflation

18th September 2015

By: Dylan Stewart

Creamer Media Reporter

  

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The recent depreciation of the Chinese yuan will put pressure on exports from South Africa to China, but could ease South Africa’s inflation, states South African law firm ENSafrica’s China practice group head Kenny Chiu.

South African goods will cost more in China, which will weaken demand and ease inflation, he states.

As at August 25, 2015, $1 was worth Rmb6.41, a significant increase from the reasonably constant Rmb6.20, where it had been for the past six months until August 10.

The recent plunge of the yuan was because of the adoption of a new market-based approach to setting the yuan’s value in the liberalising Chinese currency, explains Chiu.

Although China has the financial capability to decisively depreciate the yuan, with its $4- trillion in reserve, to get the currency to where it wants it, it appears that China is taking a gradual approach to devalue its currency to prevent a new round of currency war, says Chiu.

While the Chinese government has not set a specific timeframe, China has been having ongoing discussions with the International Monetary Fund (IMF) for the yuan to join its Special Drawing Rights (SDRs) currency basket.

SDRs are international reserve assets that the IMF uses while lending to countries and the basket currently comprises the euro, the dollar, the pound and the yen.

In August, the IMF rescheduled its revision of the current SDR basket, held every five years, from November this year to September 30, 2016.

In addition, the IMF has made it clear that for the yuan to join the SDR currency basket, China must make the yuan fully exchangeable rather than simply widening its exchange range as it has done in the last month.

“If China wishes to [acquire] SDRs, one of the key prerequisites is for the yuan to be freely usable and convertible”, Chiu reiterates. In March 2011, China announced its twelfth five-year plan, which ends with 2015 and entails gradually realising the yuan’s convertibility under the capital account.

Owing to China’s robust economic growth, internationalisation of the yuan will enhance the country’s economic openness, reduce the cost of international trade, improve the communicative power of the Chinese economy, help the country accelerate towards mid- to high-end industries and market China’s economic development.

The strong credit and firm currency value from an internationalised yuan will not only greatly reduce the cost of trade and investment between China and South Africa but also enhance the environment for investment, expand economic cooperation and improve cooperation generally, Chiu adds.

When China overtook Japan in 2010 as the world’s second-largest economy, the likelihood of internationalising the yuan was boosted. The biggest beneficiary of yuan internationalisation could be the vast number of developing countries, of which China is one, he notes.

Chiu is critical of the historical performance of developing nations, which he states have lacked communicative power and innovation in the mid- to low-end global industrial value chain, with a reasonable economic system and scientific financial order also found to be wanting.

The yuan is a currency of significance to developing countries – good credit and currency value will present tangible benefits to a vast number of developing countries, he concludes.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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