Which countries are most exposed to China’s currency devaluation?

Which countries are most exposed to China’s currency devaluation?
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China’s decision to let the yuan depreciate last week came for a number of reasons, including being a needed boost for Chinese export industries. But there are two sides to every currency swing, as the following countries are quickly learning.

Did China devalue its currency or liberalize its currency market when it suddenly changed its approach to setting the official daily rate for the yuan last week? The verdict is far from in, but it’s likely a bit of both.

For several countries in very different parts of the world, the People’s Bank of China (PBOC)’s motive is an after-thought compared to the immediate impact the change will have on their economies.

The primary concern for the countries below is whether their economies will be able to sustain themselves after this blow. For some, this is because their natural resources have fueled China’s building binge; for others, it threatens to neutralize their macro policy.

The spigot to Australian growth turned off

Australia is the world’s largest net exporter to China, sending more than US$29 billion more in goods to China each year than it receives in imports, which represents 2.4% of the Australian economy. China’s real estate boom is built on Australian iron, coal, and gold—in quite a literal sense. 70% of Australian exports to China are just those three minerals.

Now that the yuan is more than 2.5% weaker against the Australian dollar, Australian mining companies will not be able to repeat the performances they have recorded over the last decade, even after they have already been weak for over a year due to slowing construction in China. The ASX equity index fell into a correction last week on the news of devaluation, and has fallen more than 2% since the PBOC announcement.

If there is another domino to fall on the Australian economy, it may be the boom in real estate prices engendered by its mining exports.

A trio of small and vulnerable mineral exporters

Far from the largest economies affected by the yuan’s devaluation, Mongolia, Mauritania, and Zambia may be the most vulnerable.

The countries’ net exports to China make up 28.1%, 9.4%, and 3.4% of total GDP, respectively, almost entirely made up of coal, iron ore, and copper. The weakness of the yuan will make goods from these countries more expensive to Chinese producers, and the yuan they do receive from trade worth less.

Given the size of their dependence relative to the size of their economy, as well as their lack of diversification, this trio stands to be hurt even worse than Australia.

A South American star and basket case

It’s nothing new to say that Brazil’s economy is rudderless. Inflation, low oil prices, and the Petrobras scandal have turned the country’s fortunes away from the hope it had a decade ago. China’s devaluation adds an incremental headwind to the already struggling economy. Despite net exports to China only making up 0.1% of Brazilian GDP, this may be the blow that solidifies a recession in Brazil.

To Brazil’s west, Chile has been a macroeconomic star as the first South American country admitted to the OECD. With its relatively recent development of high-value added industries, its economy has begun to look similar to Australia’s: high growth, with an educated workforce, and dependent on mining exports to China. Net exports to China make up 1.4% of Chilean GDP—an order of magnitude higher than Brazil’s—of which 84% is copper.

Chile appears to be very vulnerable to the yuan devaluation, however it may be insulated by the fact that much of China’s copper use is in electronics manufacturing, not only building construction. The weaker yuan will make Chinese-manufactured electronics more competitive on the world market.

Undoing Abenomics

Japan and China have not exactly been friendly lately, as tensions over the South China Sea are mobilized for populist political gain in both countries. A newly-weakened yuan only stands to make things worse.

Japanese Prime Minister Shinzo Abe’s ‘three-arrow’ plan to revive the Japanese economy has been slow-going, and mainly only succeeded on one arrow: quantitative easing. Japan has aimed to boost its economy with a weak currency and newly-sparked inflation, just like China is now.

Since China represents Japan’s largest trading partner, the trade-weighted yen has strengthened in the last week, offsetting a portion of the Bank of Japan’s efforts to weaken the yen and stamp out deflation. Japan is likely to respond in kind and boost quantitative easing further, which could be the second blow in an Asian currency war.

The turmoil brought on by the suddenly-weak yuan is different from the typical case of devaluation for a temporary economic boost. Usually, these efforts are not fruitful because industry cannot begin to produce more goods to export before the currency begins to strengthen again, but China’s case is different. The PBOC has liberalized the system for determining the official yuan exchange rate and moved ever-so-slightly away from overvaluing its own currency, which will not be temporary.

Categories: Asia Pacific, Economics

About Author

Alex Christensen

Alex is an Editor at Global Risk Insights, who also currently works in investment research. His work on political risk and economic policy has appeared in many forums, including Business Insider, Seeking Alpha, Oilprice.com & The Emerging Market Investors Association. He holds a Master’s in Economics from the London School of Economics and BA from Washington University in St. Louis.