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Yuan Weak Link

On the face of it, the 2% revaluation of the Chinese renminbi (RMB), also
known as the yuan, won’t make much difference to British firms selling into the
booming Chinese market. But the real question is what the 21 July decision to
partially delink the RMB from the US dollar means for the future.

“The significance depends on whether you think it’s just a one-off or the
first in a series of moves,” says Julian Jessop, chief international economist
at Capital Economics.

Jessop says that a bigger change in the sterling-RMB exchange rate has
already occurred during the past couple of years.

“Because the renminbi has been pegged to the dollar and the pound has been
weakening against the dollar, sterling had already fallen against the renminbi
by about 10% before the revaluation,” he says.

At the sharp end of business, exporters to China are pleased but not exactly
jumping for joy. Ron Williams, managing director of the Blayson Group, which
exports investment casting wax, says the move “should make us just that little
bit more competitive”.

Williams points out that just how helpful the revaluation proves to be will
depend on how far Chinese buyers are buying on price rather than other factors
such as quality or service. In Blayson’s case, the lower end of its Chinese
market is more price-sensitive than the upper. “At the higher end of the market
– in aerospace and medical equipment, for instance – there isn’t really a
problem with price,” he says.

Williams’ experience is likely to prove typical for most British
business-to-business exporters. But it could be that the biggest implications of
the revaluation lie beyond the immediate impact on export sales.

Gail Foster, chief economist of the Conference Board, describes the
revaluation itself a “very token move”.

She thinks the big story lies in the new policy on easing capital movements.
“The Chinese basically have had capital controls and you can’t really have a
flexible currency as long as you have capital controls.” One key impact of this
could be that it becomes easier for British and other foreign companies that
invest in China to repatriate profits. Until now, this has proved a hit-and-miss
affair mired in Chinese bureaucracy.

“I’ve had lots of discussions with companies and some are much better at
repatriating money than others,” says Foster. “When somebody says, ‘I repatriate
money,’ somebody else immediately wants to know how.” Foster also points out
that the revaluation increases Chinese purchasing power for assets outside
China, and raises the price of Chinese assets for foreign purchasers.

But while British businesses may initially welcome the revaluation, they now
move into terra incognita. “I think the greatest significant is that, going
forward, the rules governing the exchange rate environment are going to be more
uncertain than they were in the past,” says Foster.

But Jessop says: “Speculation that this will be the first in a series of much
larger moves is overdone.

China will be wary of allowing the renminbi to rise too quickly given the
downside risks to both growth and inflation in China. Indeed, the focus of
policy has already shifted from fears of overheating to worries that low
inflation may turn into deflation.” In the long run, the biggest impact for
British business could be how the US economy reacts.

“A big revaluation should end China’s need to accumulate foreign reserves,”
says Ira Kalish, an economist with Deloitte Research.

“When that happens, the US budget deficit will have to be financed by selling
government bonds to the private sector. An increase in the supply of bonds will
lead to a rise in long-term interest rates. And that, in turn, will have a
negative effect on economic activity.” And if the US economy does catch a cold,
it could be Britain that ends up sneezing. Except that, this time, it will have
caught Asian flu.

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