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Thursday, August 27, 2015, 11:22

Currency ripples felt by China's trading partners

By Chen Jia
Currency ripples felt by China's trading partners
Yuan banknotes and US dollars are seen on a table in Yichang, central China's Hubei province on August 14, 2015. (Photo / AFP)

Shock waves from the decision to devalue the yuan against the US dollar earlier this month have reverberated across Asia.

Emerging economies fear that their exports will be hit as well as an increase in capital outflows, according to economists.

In the past two weeks, the ripple effect has triggered volatility in Asian markets as trading partners worry a cheaper yuan will raise global demand for "Made in China" products and slow growth in their countries.

Last Friday, the People's Bank of China, or central bank, raised the currency's value to 6.3864 yuan against the US dollar from a four-year low of 6.4010 on Aug 13.

During the three-day fall since Aug 11, the yuan depreciated by more than 3 percent against the green back as the PBOC introduced a new rate regime.

"The depreciation so far has been fairly small on an effective exchange rate basis given the lock-step depreciation in trading partner currencies," Joseph Incalcaterra, an economist at the HSBC Bank, one of the world's leading lenders, said. "But uncertainty surrounding the yuan's foreign exchange policy is high.

"Several central banks have voiced concerns about the impact of the move on export competitiveness, especially those that compete more directly with China in the global export markets," he added.

As the weakened yuan has largely increased the cost of exports from developing countries, a round of competitive currency devaluations has already started.

Vietnam's central bank, the State Bank of Vietnam, widened the Vietnamese dong's trading band in two separate moves last week to 3 percent around its daily fixing from 1 percent. By doing that, it effectively devaluated the dong by 1 percent.

Thi Hong, the bank's deputy governor, called the move a "more proactive and flexible way to cope with negative external factors".

In response to the PBOC's exchange rate decision, the Malaysian currency weakened beyond 4.00 ringgits against the US dollar on Aug 12. It slid to a 17-year low of 4.2200 to the green back on Aug 20.

Last Thursday, Kazakhstan abandoned tight control of the tenge and allowed it to depreciate by 22 percent against the US dollar.

The Thai baht also fell amid capital outflows after the yuan's devaluation.

Teck Leng Tan and Dominic Schnider, analysts from the Swiss financial giant UBS AG, have warned that the currencies slump in the region will continue to spill over into the global commodity markets. This will drag down prices and increase deflationary pressure.

Weak prices and market volatility could then see manufacturing activity contract in Asia as domestic demand cools in the months ahead, a report released by HSBC Bank revealed.

And if as expected, the US Federal Reserve decides to increase interest rates in the second half of this year, capital outflows from Asia are certain to pick up. This would pile more pressure on the region, economists said.

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