China’s currency devaluation – minimal impact expected on Australian red meat exports

20 August 2015

On its own, the weaker yuan would make Australian exports more expensive to buy in China.  But this is likely to be offset by the expected continued weakening of the Australian dollar and the lowering of tariffs on Australian red meat, set to begin later in 2015 when the China-Australia Free Trade Agreement (ChAFTA) enters into force.

Last week, on 11 August, the People’s Bank of China lowered the "daily fix" of the yuan by 1.9% against the US$, the largest devaluation in 20 years. By 14 August, the size of the devaluation was 4.4%. It also decided to widen the trading band to 2% either side of the "daily fix", allowing the currency to trade in a 4% range on any given day.

After Beijing “un-pegged” the yuan from the US$ in June 2010, the currency was gradually allowed to appreciate against the US$, hitting a record high in January 2014.  This went some way to addressing the concerns of western governments that the yuan was being kept artificially low to favour Chinese exports. However, as Japan and Europe have devalued their currencies as part of their Quantitative Easing, the relatively high yuan was considered out of step with the slowing Chinese economy.

Beijing is moving gradually to allow the yuan to be more market-driven, as part of its reform efforts to integrate China into the world economy.  This is a key step to increasing the volume of yuan used in trade and the volume traded on currency markets, what some are calling “the rise of the Redback”.

Rather than the devaluation being bad for Chinese growth, it is more widely expected to help the economy this year, as the lower currency is intended to help the under-performing export sector.

On the face of it, a weaker yuan will make Chinese products cheaper abroad and make foreign goods more expensive in China.  However, this is a relatively minor change, following years of gradual appreciation of the yuan to the US$.

Rather than simply making commodities more expensive for Chinese importers, the yuan devaluation could be marginally positive for countries like Australia, as Chinese manufacturers increase their demand for iron ore, coking coal and copper, to meet the growth in manufacturing that is expected to occur as a result of the devaluation.

The tariff reductions that will begin once the ChAFTA comes into force, expected later in 2015, will be a further boost to the competitiveness of Australia’s exports, including red meat.

Ultimately, as China gradually joins the world economy, it will be opening itself up further to market forces, which will add complexity to any country doing trade with China. But when it comes to imported red meat in China, the fundamentals driving demand remain strong, and a weaker yuan will not dampen Chinese consumer concerns about food safety and quality.

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