RIDING THE YUAN DEPRECIATION
by Ariel Nepomuceno
The world’s third largest economy’s unexpected devaluation of its currency the Yuan, which angered the US and other European economies for its impact on the global market, is something our industrialists, international traders, economic experts and fiscal managers must closely watch and monitor for its long term impact on the Philippine economy.
While Filipino exporters downplay the impact of China’s devaluation of the yuan, saying it will not significantly affect Philippine exports so long as the peso coasts along with the yuan devaluation, the currency devaluations of other Asian nations as well, to keep pace with the Yuan drop like Vietnam’s Dong among others, could create stiff competition in the global export market.
After the Yuan drop to its lowest international traded rate of 6.4510 to one (1) US dollar in August this year, the Philippine peso also dropped to its five-year low of P 45.93 to the US dollar. The Yuan drop created fears that China was pushing its export industry to enable it to capture an even bigger share of the trillion US dollar global export market.
But even prior to the Yuan devaluation, China was already in the process of shifting its economic thrust from export growth to a consumption driven economy. After the so called China’s “30 miracle years” in the 70’s when its GDP growth hit double digits because of its growing exports, China realized that its local consumption was low compared to its volume of exports. Moreover, the global financial crisis which affected the international export market was already creeping into China’s export industry, prompting the change in its economic policy.
When Deng Xiaoping rose to power, China emphasized the importance of foreign trade and encouraged foreign investments, capitalizing on its low cost advantage such as labor among others. Xiaoping’s economic policy spurred China’s economic growth making it the world’s third largest economy today. But China realized that its export and investment-led engines of growth were unsustainable in the long term.
China began to realize the flaws in an economy that is mostly dependent on exports and relies excessively on the economic conditions of other nations during the global financial crisis. Moreover, its low wages that attracted foreign investors to make China their production base also translated into low consumption levels in China.
Thus, with a vulnerable export driven economy, China was among those largely affected by the global financial crisis. Today, China’s GDP dropped to 7.5%, prompting an economic slow-down to allow it to rebalance its economic thrusts, relying more on private enterprise and domestic consumption instead of exports. China’s current consumption share of GDP is placed at only 35%, compared to the US economy’s 70%. China’s economic transformation is expected to help boost GDP growth while turning the country into a more independent nation that relies on its internal demand and spending.
China’s economic behavior practically allays fears of plans to expand its share in the global export market. Although, devaluating the yuan could tip the balance in the global export trade, should China decide to.
But for whatever reasons China devaluated the yuan, its economic policy shift from export growth to consumption, could create a void in the trillion US dollar global export market, an economic abyss which could be compensated by even small exporting countries like the Philippines.
And while allowing the Philippine peso to drop freely could make our exports competitive with other exporting countries like China, we could still enhance the country’s competitiveness in the global export market by giving more incentives to the country’s export industry.
The country’s current balance of trade is marked with a wide imbalance between exports and imports. We are nation that is 80% import dependent and 20% export driven, and less exports means less jobs and lower consumption level. But even with our current balance of trade, the Philippines’ projected GDP growth for 2015 is still placed at 6.2%, which is among the best in the ASEAN region. Thus, with more government incentives for the country’s export industry, there’s a big chance we could still increase the country’s GDP more than its projected maximum target of 6.9% this year.
In 2010, China’s share in the global manufactured exports reached 13.7%, up from its 12. 9% share in 2009. But China’s current shift in economic policy could affect this trend, opening new opportunities for small exporting countries like the Philippines. And should our exporters be able to exploit these opportunities, the devaluation of the yuan after all, maybe more of an advantage than a disadvantage to our economy.