CHINA SHOCKED global financial markets last week when it allowed its currency, the yuan, to fall in value against the US dollar for three straight days, fueling fears that the world’s second-biggest economy was slowing down more than what experts had expected. Stock markets in Asia and Europe suffered widespread losses and many currencies in the region weakened. On Friday the benchmark Philippine Stock Exchange index (PSEi) closed at 7,408.44, down 126 points, or 1.67 percent for the week. The peso closed at 46.215 to the dollar from 45.755 at the start of the week. The same was true for stock markets and currencies of countries in Asia and even Europe.
The move of the People’s Bank of China to devalue the yuan followed a series of unfavorable economic data: an 8-percent slump in exports, a slowdown in investment growth, a lower-than-expected 6-percent growth in factory output and the 6.6-percent drop in car sales for July. After the Chinese central bank’s actions last week, the yuan fell to its lowest against the US dollar in four years. The surprise move on Tuesday was the biggest one-day fall in the yuan since the 33-percent one-time devaluation in 1994. The next day, it fell to 6.43 against the dollar, its weakest since August 2011. Another 1.1-percent depreciation was allowed on Thursday, until the Chinese central bank halted the slide on Friday.
A cheaper yuan will help Chinese exporters by making China-made products less expensive in foreign markets. Financial analysts agreed that China’s move was designed to boost exports, which had been slowing as the yuan got overvalued. Since it was pegged to the dollar, which has been rising recently in anticipation of the US Federal Reserve Board’s increase in interest rates by September, the yuan also rose in value in step with the dollar’s rise, making Chinese goods more expensive compared to regional rivals, particularly South Korea and Japan.
At the same time, China is under pressure from the International Monetary Fund, which has backed China’s move to let its currency float. China has been urging the multilateral lending agency to include the yuan in the IMF’s basket of reserve currencies, known as Special Drawing Rights. The yuan’s inclusion would be a big step in its international acceptance. Some analysts have described the depreciation of the yuan as a win-win move for China: It was making it appear that it was allowing market forces to determine the exchange value of its currency as pushed by the IMF and, at the same time, was also helping Chinese exporters get more competitive.
On home grounds, no matter what the Philippines’ economic managers say to allay public fears, the peso will have to weaken along with the other currencies in the region in order for local exports to remain competitive. If the Bangko Sentral ng Pilipinas will defend the peso while allowing the currencies of Thailand, Vietnam, Indonesia or Malaysia to fall in value against the US dollar, Philippine-made products will become more expensive in dollar terms compared to competitors in the Asean.
Monetary authorities have no choice but to allow the peso to depreciate together with the yuan. The peso has joined its peers in the region: The Malaysian ringgit has weakened to a 17-year low. Indonesia’s rupiah also fell to its lowest since July 1998. The Singapore dollar and the Taiwan dollar likewise touched five-year lows, and the South Korean won slid near a four-year trough.
One thing going for the Philippines is the fact that oil prices have remained below $50 a barrel, down from more than $100 a barrel last year. Any impact of the currency depreciation on pump prices of gasoline and other petroleum products and transportation fares is expected to be very minimal as weak oil prices will offset the weaker peso’s effect.
Moving forward, what will be worrisome is if China’s devaluation of the yuan starts a currency war that many economists believe could destabilize the global economy. This will happen if the United States and Japan retaliate and push the value of the dollar and yen lower. In fact, some analysts cite a lingering worry that China’s move may prod other central banks to allow their currencies to also weaken in order to remain competitive. The Philippines can only hope that they will not, and can only hold on to the Chinese central bank’s assurance to global financial markets that it is not embarking on a steady depreciation of the yuan.