Of China's devalued currency, blood and windfalls
Republican US Presidential hopeful, Donald Trump, sees 'blood' everywhere. Unhappy and irritated by a question put to him by a female Fox News TV journalist during a debate between several Republican aspirants for the White House, he notoriously said she had blood coming out of her eyes and "wherever". Now he says that the devaluation of the Chinese currency over the last few days will "suck the blood" out of the US economy.
Just as his remark about the female journalist is distasteful, his comment about the devalued Chinese currency is extravagant. While the devaluation will make US exports into China more expensive, the blood will hardly be sucked out of the US economy. The three major markets for US exports in 2014 were Canada (US$312 billion), the 28-nation European Union (US$276.1 billion) and Mexico (US$240.2bmillion). China (US$123.6 billion) was fourth at half the value of exports to Mexico.
In fact, the US imports more from China than it exports. In 2014, the value of Chinese goods imported by the US was US$466.7 billion. This means that a devalued Chinese currency will result in cheaper prices, benefitting the US consumer.
Given the global reach of US media, particularly its 24-hour news networks, it would be easy to believe that the devaluation of the Chinese currency is an issue that affects the US only. But, the reality is that it affects almost every country in the world since over the last 10 years particularly, China has opened vigorous trading and investment programmes worldwide.
China undertook these initiatives when its economy was averaging annual growth of 10%, but in the last two years the growth rate has slackened to 7%. For China, with its very large population and the need to create millions of jobs annually, 7% growth is absolutely necessary. The alternative is a huge number of unemployed, dissatisfied and restless people. It has to maintain that rate of growth.
There is wide speculation that the Beijing authorities are deliberately seeking a more competitive currency to pursue export-led (rather than domestic consumption-led) growth. If that is the case and China reduces demand for commodities, a number of countries in Latin America will suffer. Brazil, for instance, which has been looking forward to exporting more manufactured goods to China, would be troubled. Mexico would also be adversely affected though in a different way. Mexico is Latin America's largest exporter of manufactured goods, competing directly with China in the world market, particularly the US and Canada. Cheaper Chinese products as a result of the devaluation could displace Mexican products.
On the other side of the coin, Mauricio Mesquita Moreira of the Inter-American Development Bank (IDB) has been quoted as saying that many Latin American currencies have depreciated by much more than the Renminbi so far this year, limiting the negative effect. Mesquita believes that China's growth rate is more important for Latin America than its exchange rate. According to him, "For each percentage point of Chinese growth, Latin America grows 0.7 percentage points. Therefore, it is important that China's economy continues to grow.
For many Caribbean countries (Antigua and Barbuda, the Bahamas, Dominica, Guyana and Jamaica among them), the devalued Chinese currency is good news both for the cost of imports and the repayment of loans. Almost all Caribbean countries import more from China than they export. The balance of trade already benefits China. The difference now will be that Caribbean countries will require less hard currencies to import Chinese products than before the 4.4% devaluation of the Renminbi (Yuan). Further, since the majority of Chinese loans to Caribbean countries is denominated in Renminbi, repayment of such loans will also be easier because, again, less hard currencies will be needed.
The Chinese government, through the People's Bank of China (PBC), has described its devaluation of the yuan as a "one-off step to make the currency more responsive to market forces". And, no less an authoritative financial agency than the International Monetary Fund (IMF) has nodded its approval of the devaluation.
China has been trying for years to secure qualification and acceptability of the yuan as one of the basket of currencies used by the IMF as its reserve assets that are known as special drawing rights (SDRs). Should this happen in a review currently on-going in the IMF, the yuan would join the US dollar, the euro, the Japanese yen, and the British pound. China would achieve its goal of world acknowledgment that the yuan has become an international currency.
If I were a betting person, my money would be on China achieving its objective. I am encouraged in that view by the IMF statement that: "Regarding the ongoing review of the IMF's SDR basket, the announced change has no direct implication for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward."
And the IMF has already said in a published statement that: "The new mechanism for determining the central parity of the Renminbi announced by the PBC appears as a welcome step as it should allow market forces to have a greater role in determining the exchange rate".
Whatever the real reason behind the decision in Beijing to devalue the yuan, what is needed worldwide is adjustment to its reality. Exporters to China will have to become more price competitive as will those countries that compete with China for sales of manufactured products.
As for countries in the Caribbean whose loan costs and imports will be cheaper, they should take advantage of it as a rare windfall to their financial situation.
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(Sir Ronald Sanders is an Antigua and Barbuda diplomat, Senior Fellow at the Institute of Commonwealth Studies, London University and Massey College, Toronto University)