Wed, Aug 19, 2015 - Page 9 News List

Yuan devaluation could be indicator of worse things to come

By Heather Stewart  /  The Observer

After China unexpectedly devalued its currency last week, one London-based economist despairingly said: “It’s August.”

While it is meant to be a time for heading for the beach or kicking back in the sunshine with the kids, August has often witnessed the first cracks for what later become profound shifts in the global economy — from what former Northern Rock chief executive officer Adam Applegarth called “the day the world changed,” when the first ripples of the credit crunch were felt in 2007, to August 2011, when the US lost its “AAA” credit rating.

Last week’s devaluation, which left the yuan about 3 percent weaker against the US dollar, was relatively modest — the pound had lost 16 percent of its value in 1967 when then-British prime minister Harold Wilson sought to reassure the public about the “pound in your pocket.”

However, China’s decision represented the largest depreciation in 20 years, and the ripples might yet be felt thousands of kilometers away. What difference is it set to make to the rest of the world?

IT COULD BE SERIOUS

China’s devaluation might be best seen as a distress signal from Beijing policymakers, in which case the world’s second-largest economy might be far weaker than the 7 percent annual growth that official figures suggest. China has been trying to shift from export-led growth to an expansion based on consumer spending while trying to deflate a property bubble. Last week’s move, which loosened the yuan’s link to the US dollar, suggests some policymakers might be losing patience with that strategy and reaching for the familiar prop of a cheap currency.

Nobel prize-winning economist Paul Krugman described the decision as “the first bite of the cherry,” suggesting more could follow, and in a reference to Chinese President Xi Jinping (習近平), said that such a modest move gave the impression that, “when it comes to economic policy Xi-who-must-be-obeyed has no idea what he’s doing.”

If its economy really is much weaker than Beijing has let on, it would be alarming for any company hoping to export to China — something firms in Britain have been encouraged to do in recent years — to lessen reliance on stodgy European economies. China was the sixth-largest destination for British exports last year. China is set to remain a vast market, but it might not be quite such a one-way bet as some commentators have suggested.

In addition, when it comes to the challenges facing Chinese policymakers, “the potential for getting this wrong is quite high,” Llewellyn Consulting analyst Russell Jones said.

A CHEAPER CHRISTMAS

China has been trying to shift away from producing cut-price consumer goods for the rest of the world. However, the label on almost any T-shirt or toy — let alone consumer gadget — is still likely to read “made in China.”

A nation’s currency is not the only determinant of how much its goods cost when they reach the high street: Chinese wages have been rising, making its products less competitive and the price of raw materials and shipping is also important. However, the devalued yuan is set to force China’s Asian rivals, such as Indonesia and South Korea, to compete even harder, and the result might be a few cents off the price of Chinese-made Christmas presents.

“Almost 9 percent of the UK’s goods imports come from China, a share that has doubled over the last decade,” Oxford Economics analyst Martin Beck said.

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