South Africa Caught Between A Weakening Yuan And Strong Dollar

South Africa Caught Between A Weakening Yuan And Strong Dollar

From Mail&Guardian. Story by Lisa Steyn.

On Tuesday China devalued the yuan by 1.9 percent, and despite assurances that they did not signal further devaluation, the government further devalued the currency by 1.6 percent the next day and by 1.1 percent on Thursday.

Although economists suggest this unusual monetary policy move is probably a positive one, many markets globally responded negatively.

In a press conference on Thursday, the People’s Bank of China said it wanted to move toward a more market-determined exchange rate (which had been pegged for four months). The bank said there was no basis for continued depreciation and said it would step in to control large fluctuations if need be.

On Wednesday, the MSCI Emerging Markets Index plummeted to its lowest point in four years. Global stock indices, such as the Dow Jones Industrial Average, the Nasdaq Composite, the FTSE 100 and the Hang Seng, declined on Tuesday and Wednesday. The Shanghai Composite Index did not decline but experienced upticks in performance over the same period.

On Wednesday South Africa’s Johannesburg Stock Exchange All Share Index closed 3.16 percent lower and the rand, already at 14-year lows, weakened, reached R12.87.

South Africa, along with other emerging markets, is now in the cross hairs of a weakening yuan and a strong dollar. The latter is expected to strengthen further once expected rate increases by the U.S. Federal Reserve begin.

Lars Christensen, Copenhagen-based independent economist and founder of Markets and Money Advisory, said that had China signalled on Tuesday that it wanted to ease monetary policy, there would probably have been a rally across markets. “But the sudden move sends a signal that things are worse in China than expected, or than what official numbers are saying,” he said.

Floating exchange rates, however, have been the norm in many countries since the 1990s and a move in this direction was the right step for China, he said.

China’s move to a consumer economy means it can no longer control demand and supply components as it had in an industrial economy. The devaluation shows a focus on trying to fix exports, said Stanlib chief economist Kevin Lings, who added that the initial devaluation of 2 percent was “incredibly modest” because some currencies move that much on any given day. “It signals intent from authorities to boost growth. On the face of it, it suggests a good a thing.”

A weaker yuan could make the U.S. Federal Reserve think twice about raising interest rates. Speculation has already seen investment removed from emerging economies and placed back into the US.

Lings said the move is an alert to the prevailing scenario: the biggest loser in the face of continued devaluation of the yuan will be the U.S. because the dollar will continue to be relatively strong, hurting its exports. The weaker yuan means lower import prices for the U.S.

Devaluation of Chinese currency could ultimately yield positive results for South Africa in the form of a commodities boost in the medium term. But, if it makes China more competitive, it could further undermine South Africa’s manufacturing base.

The downturn in China is a prominent cause of reduced commodities prices, which have fallen significantly in recent months as demand dries up and oversupply persists in many cases. The bottoming-out of commodities prices has been felt worldwide, and it will be especially painful in South Africa, where about 10,000 jobs are to be lost in the mining industry following a spate of retrenchment notices.

Last week the minister of minerals resources called an emergency meeting and established a technical task team to find ways to stem the massive loss of jobs.

Read more at  Mail&Guardian.