Between Tuesday and Wednesday The People’s Bank of China decided to depreciate the yuan about 3.5% against the dollar. Thus, in just a few hours, there was a change in the purchase price of the dollar; to pay 6.1162 yuan to the dollar, it went to 6.44 yuan.
The decision has been taken as a result of various factors. The Bank wields the need to bring the real value of the currency, specify it and fix it. The post-2008 crises brought with it a devaluation of the Japanese Yen and the Euro, which meant, in parallel, Yuan appreciation. Thus, the devaluation of the People’s Bank of China fails to generate an updated value of its currency. If we add the same time that Chinese exports suffered a decline of 8.3% year on year (from July 2014 to the same month of 2015), the devaluation serves the purpose of promoting the export of domestic manufacturing by lowering international products.
Through this economic determination, China tries to restore some parity with the euro and the yen, resuming export levels and continuing economic growth, which had declined in recent years.
In turn, this measure became multiple consequences: the yuan took the lowest price registered in the last three years and also contributed to a growing instability in international markets (generating drop bags big companies like Apple and dragging down oil). But what are the implications for this event are Argentina?
It is known that, in recent years, bilateral relations between Argentina and China have been strengthened through various agreements. One of the most important is the swap began in October 2014, in which China gave the Central Bank of Argentina (BCRA) an equivalent amount of $ 814 million in Chinese currency, equivalent to about 25% of the national reserves . The devaluation of the yuan could in principle mean a significant loss of value of the national reserves.
However, Alejandro Vanoli, president of the Central Bank, said there is no danger to the national reserves since, in his words, the devaluation of the yuan will not affect the BCRA because patrimonial assets that currency are perfectly shod liabilities “which may mean that there are guarantees and contracts to keep the swap amounts fixed in dollars.
Beyond the impact it has on national reserves, performance that has an impact on the eastern nation trade levels we have with the country. Overlooking the contracts signed in April this year, if the devaluation policy of China fails to recover export levels and growth , it can mean a decrease in our exports to the east.
The vast Chinese industry, called the “world factory” is oriented towards export production, so the alarm about a reduction in exports in the last year should not be taken lightly. This decrease can lead to a contraction in the level of activity, linked to lower levels of consumption and, most likely, to food imports.
This would lead to a considerable reduction in the volume of Argentine exports, which are mostly destination in China Republic and the international prices of the same, impacting, in the medium term, our balance negatively payment. Thus, it is logical to think that the economic situation of our main trade partner outside Latin America, will have its impact on our economy directly, further if the stock of national reserves in dollar rises or falls.
China’s industrial strategy was always geared to price competition, that is, to attract foreign investment in production due to their low costs, especially labor. As we said, the devaluation of the yuan fulfills this logic to cheaper Chinese production in the world. If this works, the country’s recovery prospects are good, especially considering that the large trade surplus that China had about since leaving the communist regime allowed the accumulation of a large mass of reserves, allowing finance, if necessary, a trade deficit for a period of time.
In conclusion, the devaluation of the yuan could touch the purchasing power of our reserves (depending if our imports are, in proportion, of Chinese origin or not) in a short term, but the economic situation in China he impact of a stronger in the medium or long term if the country fails to regain its level of activity in the coming months so.
This article was written in collaboration between Diego Martin Cuneo (Researcher CECREDA) and Gabriela Jan (Analyst CECREDA).
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