Devaluation of Chinese currency could have ripple effect on supply chains

When news broke last week regarding the Chinese government’s decision to devalue, its dollar, known as the Yuan, by nearly two percent, it sent a ripple throughout the global economy in a few different ways.

One of the things this devaluation did, according to a Wall Street Journal report, was make Chinese goods “instantly more competitive with American products,” and also likely hurt the White House ‘s odds of completing its Transpacific Trade Partnership.

The impetus for China to devalue its dollar is based on the nation’s need to boost what it considers a sluggish economy, even though its GDP remains healthy on paper, with a 7 percent estimate for 2015. But as previously noted in this space, China’s stock market recently had its largest single-day loss ever, when it dropped 8.5 percent on July 27 for its largest daily loss going back to 2007, coupled with declining demand being voiced by multinational companies with large business operations there.

What’s more, as pointed out in a USA Today report, slower growth in China will create concern for the U.S. Federal Reserve in terms of raising interest rates, as a weaker Yuan means the U.S. dollar will be stronger and could stall U.S. economic growth. And it added that if a rate hike does happen, the U.S. dollar will gain more strength and put pressure on both U.S. exports and domestic growth.

So, where does this leave things from a supply chain and global trade perspective?

Josh Green, CEO of Panjiva, said that in the near-term, the devaluation of China’s currency will give a boost to Chinese exports, by effectively making them cheaper.

“This is good news for sourcing executives who are buying lots of product from China,” he explained. “But this move by Chinese authorities is further evidence that the Chinese economy is slowing down.  What will happen inside China––and to the global economy––if the Chinese authorities fail in their efforts to engineer a smooth landing for a faltering economy?  Nothing good.”

The devaluation of Chinese currency was viewed as interesting if not surprising under the circumstances by Paul Bingham, vice president at Boston-based EDR Group.

“I think the impacts on U.S. imports will not be substantial because the change is more about new ongoing exchange rate management policy relaxation than an actual devaluation of significant magnitude immediately,” he said.  “The roughly two percent devaluation is not large enough to cause substantial shifts towards additional broad U.S. importing from China immediately.  It will affect some traded commodities however so that the net impact will clearly be adding to the U.S. trade deficit with China.  More, now cheaper, Chinese goods will be imported into the U.S. and fewer U.S. exports will be sold into China, as those exports from the U.S. are now more expensive, in renimbi terms.”

But he noted that that the greater impact on Chinese trade should be on its trade with other trade partner countries, whose currencies have fallen against the U.S. dollar and the renimbi during the past year. 

“If I understand the shift in exchange rate policy by China correctly, it will permit the renimbi to more closely reflect the weakness in the Chinese economy, enabling the Chinese exporters to remain more price competitive selling into all their foreign country trade partner markets,” he explained. “As the U.S. has lost share of overall Chinese trade activity in recent years, the significance of the rest of the world to China, and China’s currency exchange rates with countries besides the U.S. has become more important.  This new policy shift is partially in recognition of this continuing evolution in Chinese trade patterns away from Transpacific trade with the U.S.”

Though the impacts on merchandise trade, including the functioning of U.S. supply chains, probably won’t be very significant immediately, Bingham said the change will make Chinese exports more price competitive at the margin. 

“This means for the trade in commoditized or low-margin goods for which other-exporter-country competition is strong and source supply countries can be shifted relatively quickly, China could see quick growth in export share as foreign customers increasingly use China as a lower cost supplier,” Bingham noted.  “That is more likely the case for resource commodities and some intermediate goods than for manufactured products that typically take longer for supply chains to adjust.”