This month has seen the value of the Chinese Yuan fall more than it has in over 20 years, possibly resulting in a domino effect on all the economies across the Asia-Pacific region.
The sharp drop in the value of the Yuan has had a clear impact around the region, especially affecting the currencies and economies of Malaysia, Singapore and the Philippines.
The People’s Bank of China took everyone by surprise when it lowered the Yuan’s daily reference rate by 1.9% against the dollar on the 11th of August. This was done by implementing a change in the way the value of the currency was set, slowly diverging from using a reference rate set from the average values of the previous 10 days to using the values set at the close of the previous day.
The effect of the shift mentioned above was the biggest fall in the value of the currency since 1993. It kept falling the next two days until it reached 6.39 Yuan on the 14th of August.
The movement of the Yuan set the path for other currencies in this region of the world to follow. The fall in Yuan played a role in pushing down the value of other Southeast Asian currencies.
The drop in the value of the Yuan makes Chinese exports more competitive, resulting in other countries following suit to stay competitive themselves.
The Singapore dollar fell by 1.4% to a five-year low. The Thai Baht fell 0.8% around the same time to a six-year low of 35.36 against the dollar. The Philippine peso also fell hard to 45.86 for a dollar.
On Aug 17, both the Indonesian rupiah and the Malaysian ringgit hit their lowest levels against the US dollar since the 1997 Asian financial crisis, closing at 13,821 and 4.0995 per dollar, respectively.
“The (exchange rate per dollar of) Southeast Asian currencies has fallen more than that of the Chinese yuan,” says Jayant Menon, Asian Development Bank (ADB)’s leading economist at the office for regional economic integration. “Quite a few (currencies) that were affected.”
This has already been a bad year for Southeast Asian currencies as they are facing a stronger dollar and slowing economic growth. Falling imports and expectations of rising interest rates in the US are expected to be the main drivers involved in shifting capital back to the US from other regions of the world, especially Southeast Asia.
However, the bad news does not end there. Almost every industry is expected to be negatively impacted by this shift in the value of the Yuan.
Automobile giants General Motors and Volkswagen could be stricken because a large proportion of their income is from China. Income from operations in China makes up about half of GM’s income as well as about a third of The People’s Car manufacturer. The weaker Yuan could result in unsolicited losses for both of these automobile giants.
Another industry expected to be hit is the luxury retailers. LVMH (EPA:MC), which controls Louis Vuitton, earns about a sixth of its income from China. Share prices of other brands such as Burberry, Tod’s and Salvatore Ferragamo have fallen due to slower growth expectations in China.
One key industry to monitor would be the tourism industry. The fallen Yuan is expected to discourage Chinese travelers to venture out of their motherland. Mainland China produces the majority of the tourists that arrive in Hong Kong, South Korea, Taiwan, and Thailand. There is no telling to which extent the fall of the Yuan will affect the tourism industry in countries that have a big focus on Chinese tourists.
The decrease in the value of the Yuan has brought about the fall in the value of other Asian-Pacific currencies. Almost all industries in the region are expected to be affected negatively as well and it will just be a matter of time to see the full extent of the impact that the fallen Yuan will bring about.