China's announcement last month that it would no longer peg its currency to the US dollar has been seen as evidence of the country’s willingness to engage with the world economy.
China's announcement last month that it would no longer peg its currency to the US dollar has been seen as evidence of the country’s willingness to engage with the world economy.
But despite the economic significance of the decision to let the yuan float in a tight band against a group of foreign currencies, analysts believe the impact on global economies will be minimal, at least for now.
Several analysts spoken to by WA Business News said the impact to Australia would be small because China revalued its exchange rate for the yuan, or Renminbi (‘people’s money’), by just 2.1 per cent.
An adjustment of 10 to 15 per cent was expected here, while officials in the US were hoping for a 25 per cent revaluation.
In addition, the exchange regime has also changed. Instead of fixing the yuan to the US dollar, the People’s Bank of China (China’s central bank, the equivalent of the Reserve Bank of Australia) now sets the exchange rate according to what is known as a ‘crawling peg’.
It means the yuan is regularly adjusted by the bank based on a basket of currencies weighted by China’s major trading partners.
Australia’s exporters should get a boost because the revaluation means China’s purchasing power has increased, but that’s also the case for other countries exporting to China.
Chamber of Commerce and Industry WA senior economist, John Nicolaou, DJ Carmichael associate director Mike Munro, and Australian Trade Commission chief economist Tim Harcourt agreed that China’s revaluation was small, but nevertheless a step in the right direction.
“Effectively the revaluation will increase the relative price of the yuan to the Australian dollar,” Mr Nicolaou said.
“It also means China’s purchasing power for the state’s commodities has increased and generally makes our exports more competitive.”
He said the revaluation would make Chinese imported goods more expensive in Australian dollar terms, which would have both positive and negative effects.
It will increase the relative price of Chinese imports (clothing, televisions, etc) and therefore reduce their purchasing power. This may result in a reduction in Chinese imports demanded by Australia.
The impact on Australia’s import competing industries (such as our textiles industry) will be positive as it will improve their competitiveness, because the price of their competitor’s products increases.
“However, we are talking about a very minor revaluation, which is unlikely to have any real impact or show any noticeable change in trade patterns,” Mr Nicolaou said.
He said the 25 per cent revaluation the Americans wanted would have had a much larger and dramatic impact.
“Ten to 15 per cent would have been a bit more noticeable and there is the expectation that it will happen, it is just a question of when.”
A more flexible exchange rate regime is expected to open the way for further revaluations, which should benefit Australia’s exports over the long-term, according to Mr Harcourt.
“High economic growth rates generated by China will continue to dominate the export plans of our larger exporters like the Rio Tinto and the BHP Billitons of this world, which tend to negotiate longer term contracts,” Mr Harcourt said.
He said about 3,250 companies exported to China, with 10 per cent of all SME exporters selling products there.
“The exchange rate is the number one issue for these exporters,” Mr Harcourt said.
“For these smaller companies, many of which are in manufacturing and business services, the decision makes their goods and services a little bit cheaper in the Chinese market.”
From a brokering perspective, Mr Munro said markets were encouraged that China had relaxed and moved towards an easing of the yuan.
“It was a small move, but the question is will they make another change, when will they do it and how much will they change it by,” he said.
“The Chinese will do what they want and at a time that suits them.
“Most importantly, they understood the need for it.”
It is too early to pick the long run implications of the yuan, according to Mr Harcourt, who believes the most important implication of the People’s Bank’s decision was its symbolism.
“Like joining the WTO, the decision indicates China’s willingness to integrate with the world economy and be part of the international trading system,” he said.
“What might seem to be a first small step to the world financial markets is actually a giant leap forward for China.”
