Weaker yuan could create winners

Analysts say impact of devaluation will vary from country to country

The yuan's devaluation is a mixed bag of opportunities and challenges for African countries, with one leading Africa analyst saying the strengthening of the US dollar will prove more damaging to emerging economies, while another predicts wide net gains for Africa on the back of a softer Chinese currency.

London-based Razia Khan, Standard Chartered's managing director and chief economist Africa, says the impact of the yuan's devaluation on African countries will depend on how China's foreign exchange reforms are interpreted.

"At Standard Chartered, we do not see this (the yuan's devaluation) as an attempt to deliberately weaken the yuan. We see it as part of a series of longer-term reforms, aimed at allowing more market determination of the Chinese foreign exchange rate, possibly to allow for possible SDR (special drawing rights) inclusion of China's currency, thus boosting its status as a reserve currency," says Khan.

In the near future there is an expectation that these reforms will result in more volatility in China's foreign exchange rate than has traditionally been the case.

"With the Federal Reserve likely to tighten US monetary policy, this should reinforce the trend of a strong US dollar. Emerging market currencies such as the South African rand, which weakened to its lowest level versus the dollar since 2001 (12.90 on Aug 18), have been hard hit."

Khan says a stronger US dollar and weaker commodity prices have already affected other frontier African currencies.

"While they will be less impacted by China's move, as their currency markets are typically less liquid than, say, South Africa's foreign exchange market, the trend of a stronger US dollar will nonetheless be reinforced."

Khan says those likely to gain most from the yuan's devaluations are African countries able to denominate more of their trade in yuan, as they should benefit from slightly cheaper imports.

The relative losers will be economies with extremely narrow export bases, dependent on the export of just one commodity, especially in instances where that commodity price has been affected by perceptions of a slowdown in China and weaker Chinese import demand.

"Copper prices have been affected in this way, so recent data might be seen as an additional negative for Zambia, which is already grappling with power sector issues of its own."

Khan says imports from China to Africa will be cheaper, but only to the extent that trade is denominated in yuan.

"For nascent African industry, it may well make it more difficult to compete internationally."

In the case of South Africa, the rand's weakness and poor domestic data have been the main reasons for its economic slowdown.

"One could argue that the rand has weakened a lot more than the renminbi versus the dollar - other more structural factors are also a factor in the weakness of South Africa's industry," says Khan.

South African Reserve Bank Governor Lesetja Kganyago, speaking at the Reuters Economist of the Year event in Johannesburg this month, warned that the softer yuan would affect the competitiveness of South Africa's exports.

University of Cape Town professor Don Ross, an expert on intra- and external African trade and economic growth, says the lower yuan will definitely make Chinese exports a lot more competitive.

"So, any goods China exports that South Africa exports will enjoy greater competitiveness against us. On the other hand, the rand has fallen by much more than the yuan has, so the recent exchange rate fluctuations haven't hurt our terms of trade.

"African countries that import a lot of consumer goods and intermediate goods from China - so, many of them, but especially Ethiopia, Kenya, and Tanzania, along with South Africa - will benefit from the cheaper yuan. Countries with similar export profiles to China's may lose because of reduced competitiveness of their exports. There aren't many such countries."

Ross says the yuan's devaluation will have little impact on commodities exporters because prices for these are set in global markets.

"So they'll simply get more yuan from sales to China, canceling out their lower unit value. On the whole, then, my expectation is that Africa in general will enjoy net gains from the devaluation."

China-Africa trade has quadrupled over 10 years and grew to $210 billion in 2013, the last year that complete statistics are available. This is more than double US-Africa trade, which is $85 billion. There are also more than 2,000 Chinese enterprises investing in Africa.

One of South Africa's leading economists, Cees Bruggeman, says the yuan de-linking from the Fed was welcome news, as was China taking greater market action in its currency fixing and offering.

"These are overdue reforms demanded by, for instance, the IMF, and allows China to achieve a greater reserve currency role internationally in competition with the dollar over time. There is the obvious thought that the depreciating yuan is also informed by domestic and Chinese and industrial and export weaknesses," says Bruggeman.

"Companies worldwide deriving sales and earnings from their China trade may find themselves marked down (at least in dollar terms) as their prospects are looked at more askance than before.

"This same treatment is likely to continue for commodities, especially those heavily dependent on Chinese demand and already experiencing supply gluts. Thus the slide in most commodity prices, including copper, iron ore, coal and oil, may not be over.

"This, in turn, has implications for commodity producers and emerging market currencies whose risk profiles may not yet be adequately reflected in capital flows," says Bruggeman.

A World Bank blog last month on trade between Africa and China noted that slower growth in China has contributed to "downward pressure on global commodity prices and is taking a toll on resource-rich sub-Saharan Africa".

"That said, over the medium term, Chinese economic engagement should continue to grow as reflected in recent proposals by the Chinese government to invest in regional rail networks, eventually linking five East African countries," it said.

Cheaper Chinese manufactured and capital goods are displacing more expensive African imports from the US and the European Union.

"A third of sub-Saharan imports from China comprise capital goods, while consumer goods such as fridges, TVs and other manufactured goods make up the rest. Imports of the latter are about three times as large as manufactured goods imports from the US and the European Union," the World Bank blog noted.

Meanwhile, South Africa's ruling party, the African National Congress, has reiterated that it continues to view China's economy as integral to its own international and domestic agenda.

In its discussion documents ahead of its National General Council in October, the party said the rise of China as the second-biggest economy and the re-emergence of Russia's economy are gradually redefining the world order.

"The growing influence of China on the global economy is an important factor in the balance of global power relations," says the discussion document on international relations.

South Africa, Russia, China, Brazil and India make up the BRICS bloc, which has established a bank seen as vital to the further development of these countries.

The author is the deputy editor of the Cape Argus in South Africa. He is on a 10-month scholarship with the China Africa Press Centre and is a visiting journalist with China Daily.

(China Daily Africa Weekly 08/21/2015 page8)