Compared with other currencies, the yuan-dollar relationship has been stable for 20 years

Compared with other currencies, the yuan-dollar relationship has been stable for 20 years

Why the fuss about China’s yuan devaluation earlier this month? While pretty trivial by the standards of the past 50 years, it has managed to raise all sorts of hackles, writes Mike Flanagan.

In the week following the devaluation of the Chinese yuan on 11 August, the currency fell 4.4% against the US dollar. By comparison, the US dollar devalued 49% against the euro between mid-2000 and mid-2008, and the Indian rupee has devalued 38% against the dollar over the past four years.

The yuan devaluation, though, has managed to raise all sorts of hackles.

1: It follows 20 years of stability

China’s switch in the 1980s from total isolation to dependence on international trade coincided with 15 years of spectacular currency devaluation, which drove the value of its yuan from 58 US cents in 1981 to 12 cents in 1995.

Since then, after largely American claims of dirty tricks, its currency has been manipulated back up to about 16 cents. By the standards of the roller-coaster rates between the world’s other currencies since 1995, the yuan:dollar relationship has been extraordinarily calm and peaceful.

2: However improbably, many Americans see it as a US crisis

Sander Levin – a hard-core China opponent in the US House of Representatives – insisted that the August devaluation illustrates “China’s history of devaluing its currency to gain an unfair export advantage.”

Actually, this month's devaluation takes the yuan back to where it was in August 2011. Since then, not only has the rupee devalued, but the euro’s devalued 24% against the dollar, the Japanese yen’s down 38% and the British pound’s down 5% - while the Russian rouble’s down 55%.

Why haven’t the Chinese let their currency fall while all America’s other major trading partners have? Partly because the Chinese feel good about a constantly appreciating currency – and partly because they really don’t want their trading relations with the US undermined by an American legislator who has not watched currency rates for 20 years.

But no American politician is ever going to be stopped from flogging a dead horse by the facts. So Levin is now insisting that the devaluation “highlights the need to include a strong and effective obligation on currency manipulation in TPP (the Trans-Pacific Partnership trade deal).”

China’s not part of the TPP. But an outbreak of US outrage over currency manipulation is a great way for trade opponents to create another obstacle to stop the countries negotiating it from reaching an agreement – and preventing the US Congress from endorsing any agreement they make.

The chances the 12 potential TPP members will endorse an agreement in the next two years have just got even more remote.

3: China’s trade problem isn’t in the US

China devalued partly because its exports were falling – but falling exports to the US aren’t the main problem.

In our industry, for example, in 2014 the US received just 17% of Chinese apparel exports. Though the US dollar value of apparel exports in Jan-July was 6.2% down on the previous year, the volume (in square metres) of US apparel imports from China was up 5.4% year on year in the first half of 2015, as average prices fell 4%.

China’s problem is partly falling exports to many emerging markets (like Russia) – but mainly the EU and Japan, which together buy twice as many of its clothes as the US.

  • The euro’s down 17.5% against the yuan and the US dollar in the first half of 2015. So, with European importers paying, on average, 12.7% more for Chinese garments than a year earlier, China’s share of EU imports fell from 35.9% to 34.6%.
  • Rising tension with China made Japan’s government and retailers decide five years ago to cut Japanese reliance on China as a manufacturing centre. In 2008, China accounted for 93% of clothes sold in Japan – but in the first half of 2015, that had fallen to 73%.

A 4.4% devaluation isn’t going to solve the problems of political difficulties with Japan (many of them of China’s making) and a devaluing euro. It’s going to take a much greater fall in the yuan – or real political change in China – to make a real impression on China’s difficulties in the two markets that account for most of its exports. Chinese manufacturers are likely to start pushing for that greater fall.

Possibly the biggest significance of the August devaluation is that, after 20 years of currency stability or appreciation, China’s traders may now realise pressure for more devaluation can have an effect.

4: Other garment exporters think China’s problems make theirs worse

Garment exporters elsewhere in Asia have also seen their local wages rise over the past five years (many even faster than China’s). Few have been as skilled as China’s in driving their productivity up – and they’re inevitably going to start demanding that their currency should fall, or that their governments should find some other ways of subsidising them.

That pressure’s already started.

  • On devaluation day, the All Pakistan Textile Mills Association (APTMA) claimed a 12% to 15% Pakistani rupee devaluation was the only alternative to a $4bn collapse in textile exports.
  • India’s Cotton Textiles Export Promotion Council (Texprocil) called for immediate subsidies for exporters on India’s interest rates, while other groups in India continued to press for lower synthetic yarn prices and faster payments of agreed subsidies.
  • Most other Asian currencies started falling on the assumption that further devaluations would follow elsewhere.

Any devaluations will intensify local inflation, which will increase pressure for higher wages.

5: And Western brands aren’t too happy either

For the past decade, many Western brands and retailers have invested relative fortunes in developing sales to China – as experts insisted that’s where future profits were going to come from.

The devaluation (and the almost inevitable copycat devaluations elsewhere in Asia) will depress those profits when translated into the euros, dollars, pounds or kronor the brands keep their accounts in.

Devaluation will also further reduce buying costs across the chains, so the net effect on their worldwide profits is likely to be beneficial. But they’ll make their Asian sales operations even less profitable than most are already. How much less profitable depends on how much more devaluation follows.

6: A minor event in itself; it’s what happens next that matters

China’s devaluation, of itself trivial, is very likely to spark off an unpredictable set of reactions by Chinese exporters, their competitors, their customers and their customers’ governments.

The crucial question for the garment trade isn’t the immediate effect of this month’s devaluation: it’s where the reactions to it lead. Beware of anyone who thinks they can predict that can of wriggling worms.