THE very recent devaluation by China of its currency, making the yuan weaker by at least 2 percent against the US dollar, sent shockwaves to the global financial markets and continuously threatens emerging and developing economies. The change in the yuan policy also has an immediate political effect, as China is considered to be the largest and busiest trader in the world.
In recent years, China made every effort to transform itself from being a wide-scale factory of low-priced consumer products to the most vibrant superpower of the world. The “Made in China” mark is conspicuous in virtually every piece of clothing, house furnishing, gadget, food product, or toy that we buy anywhere. While the yuan will determine the value of China’s goods in the international market, we are all aware that the salaries of Chinese workers are increasing, the price of raw materials, logistical and transport costs are, likewise, escalating and may have a negative competitive effect on its products.
China’s July exports fell about 8 percent compared to year-ago figures, and its growth appears to be slower than usual. The lower yuan value will also compel other Asian countries to compete even harder. Certainly, when something goes wrong in the biggest economy in Asia, the ripple effects are felt almost instantaneously all around.
Negative regional impact and paranoia
IN the Philippines, the stock market fell 487.97 points—a huge decline in just one day and closed at 6,791.01—ultimately resulting to a year-to-date loss of almost 6 percent. Philippine Stock Exchange President Hans B. Sicat said the P764 billion in market capitalization have been wiped out, and the market’s entire gains in 2015 totally erased. The same effect is being felt in Malaysia, Korea, Japan, some parts of Europe and the US, where the Federal Reserve is planning to tighten interest rates. Investors are seriously worried, and some financial analysts are wary of a looming currency war, knowing that weaker exchange rates could lead to another devastating Asian economic crisis. Back in the early 1990s, Asia was considered the most attractive place to invest. However, this favorable condition did not last long with China’s devaluation move years ago. That devaluation moved other central banks around the world to devalue their own currencies to help their own exporters and to prevent capital outflows. Similarly, the commodities markets were impacted too because of the softening demand from China. The result was a deep recession and economic downturn.
No need to panic
Will this recent event lead to another regional financial crisis? There is always that possibility, but present-day realities would tend to show that Asian economies are now stronger and more resilient to events such as these. Most of the countries in the region now enjoy strong fiscal conditions, robust current account balances, less exposure to hot money inflows, and safe and sound foreign-exchange reserves. Finally, local currencies less tied to the dollar can better cushion the negative effects of the yuan devaluation.
But there appears to be neither cogent reason to overextend the analyses nor overreact to the market plunge. There is no imperative to join the currency war and deflate the peso in order to compete. Our economic planners are confident that the country’s strong macroeconomic fundamentals will see us through. Economic growth will continue as increased spending is expected, what with the forthcoming elections. Our peso is still within the middle range of the regional currency volatility rate per our central bank. All financial indications show that the market will recover and return to its normal state. However, we should not be too comfortable. Our government must always be prepared for any eventuality, as China’s latest decision is apparently the biggest devaluation in 20 years and Asia has always been dependent on China. We must monitor very closely the unfair trade advantages brought about by currency manipulation activities of other countries.
Our traditional sources of growth—high domestic consumption, government spending, overseas Filipino workers remittances and huge investments in the property, manufacturing, business-process outsourcing and the services sectors must be protected and further enhanced if only to save us from the possible domino effect of the yuan’s fall.