Last week China devalued their currency, the yuan, against the dollar. The currency automatically lost nearly 3 percent of its value on the announcement that the Chinese would no longer support their currency at its previous level. Without placing a trade, the yuan dived on the news, as intended.
China has artificially kept the value of the yuan low against the dollar for nearly two decades. As a developing nation, China has been focused on the modernization of its country, developing infrastructure, moving rural workers to cities and taking any other steps necessary to power its export-driven manufacturing industry. To that end, Beijing has used any and all tactics to remain competitive - to much success.
When I first visited China a decade ago, one dollar bought over 8 yuan or "renminbi" as it's less often referred to. Now, one dollar buys 6.4 yuan. A week ago, it bought 6.2 yuan. Why would China purposefully decrease the value of its currency, wiping trillions of dollars off Chinese balance sheets?
In the past, China's economy was white-hot. Millions of rural workers moved from villages to urban areas, areas that were soon bursting at the seams. This caused prices of housing and commercial real estate to rise rapidly. As workers became harder and harder to find, real wages increased. China no longer was the inexpensive destination for all things. Inflation began to take hold in the country. All the while, the national currency barely appreciated against its largest trading partner's currency, the dollar. After much pressure, the Chinese relaxed their peg against the dollar, allowing it to appreciate gradually. The yuan appreciated by nearly 25 percent over a decade, not exactly a jump.
For years, the consensus was that China was so successful and so competitive that should Beijing allow the yuan to float freely, it would appreciate by so much that its goods would no longer be as attractive to global consumers, especially the United States; thus, it was kept artificially low. Fast forward several years to 2015. China is now going through what the rest of the world experienced in 2008. Its stock market has crashed, its housing bubble is bursting and investors are scared. As global demand for its goods has slowed do to a general malaise in the global economy, China has been hit hard. The Chinese have bypassed their fear of currency valuation and have actively pursued devaluing the currency.
What does this do? It immediately makes foreign goods more expensive for Chinese to buy and makes Chinese goods cheaper for foreigners to buy. The intent is to spur demand for Chinese goods and more importantly to send a signal to competitors. China's Asian competitors have been gaining market share in low-tech industries in which China has become too expensive. This includes industries such as textiles and home furnishings. The beneficiaries of China's being priced out of these markets have been countries such as Thailand, Vietnam and Bangladesh, as well as high-tech countries such as South Korea, Japan and Malaysia. The latter two have actually begun to devalue their currency as well, setting-off a race to the bottom.
Globally, export driven nations are okay with the new normal - a "strong-dollar" period. As the dollar gains strength on speculation that the U.S. Federal Reserve will raise interest rates at its next meeting in September, global currencies continue to devalue against it. In the last year, Russia, Ukraine, Colombia and Brazil have all seen their currencies fall in excess of 50 percent against the dollar. Other countries have lost between 20-30 percent against the dollar in the last year, including Canada, Japan, Turkey, Sweden, Norway, Mexico, Poland, Hungary, the Czech Republic, Malaysia and South Africa. The euro has also lost nearly 18 percent against the dollar.
So is a "falling currency" bad? Not necessarily. If exports are not heavily dependent on dollar-denominated raw materials or other inputs to production, a weak national currency gives domestic manufacturers a leg-up on the competition. Turkey's biggest challenge is going to be to use this period of a weak Turkish lira to its advantage by promoting exports and encouraging investment into higher-margin fields and tech-based fields. Should Turkey or any other country be successful in taking advantage of this strong-dollar period, they will reap the rewards in the long-run. Should this opportunity be squandered, it could lead to increased financial woes in the future.
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