China, the fastest growing trading partner to sub-Saharan Africa, devalued its currency for three days in a row over the past weeks spurring financial markets turmoil across the world
Companies’ worldwide deriving sales and earnings from their China trade may find themselves marked down.
Its increased demand for Africa’s natural resources has seen many countries on the continent experience a commodities boom that has driven many economies higher, making the region one of the fastest growing in the world over.
But the sudden devaluation of the Yuan is now a painful reminder to many of its African partners of the risks of overdependence on the Asian giant.
Ghanatalksbusiness.com’s Paa Swanzy-Essuman (GTB) had a chat with Dr. Kofi Lindsay (DL, an economist and a legal practitioner with deep insights into trade between the Asian tiger and the rest of the world on his perspectives on this move by China and how Ghana and Africa stand to benefit or bear the negative effects.
GTB: How does China devaluing it currency affect our trade with them, negatively or positively?
DL: It’s good for us…
Well, basically it means that if you are buying a unit of goods dominated in Chinese Yuan its going to be cheaper for you than the week before. So, in that sense, I expect that, really given the fact that we buy a lot from china, there would be a marginal increase in the demand for Chinese goods because they generally become cheaper from elsewhere. So those that were buying from elsewhere would be cheaper to obtain from china so the demand for Chinese goods will increase.
GTB: How will it affect our trade with the other regions across the globe, say Europe and America?
It won’t necessarily affect that much, we are buying the goods and we can chose to buy or not to buy. But if the Chinese goods are generally cheaper and we are shifting the demand for European goods and now, really our demands are not big to be noticeable. But by and large, the volume of goods bought from china will increase. There would be a decline in the demand for goods from other areas- Europe and America. We don’t play a bigger part in their trade and that should not affect them in any way.
GTB: What is devaluation? How does it play to our advantage (Ghana)?
DL: Devaluation means, because the Chinese Yuan was a fixed rate, so if last year it was 2 Chinese Yuan to the cedi, now the Chinese currency have reduced. Our currency has appreciated as against the Chinese Yuan. We can therefore buy more with the local currency-cedi from china. By extension, they are making themselves competitive in the international trade. Over the years a lot of people were buying from china but right now you see prices from china rising taking up by demand from Vietnam and elsewhere. All that the Chinese are trying to do, to reverse this trend is being more competitive. What the economist will term, “beggar thy neighbor” they will ensure that as their goods become cheaper, it translates into unemployment or potential unemployment in the other countries that would otherwise have had the demand for their exports. So by and large they are being competitive but they are beggaring their neighbors, that is, countries producing similar goods for which partners will shift demand for the goods from those countries into china.
GTB: Can Ghana as a developing country take a cue from China and also devalue the local currency-cedi which has seen its value dropped in recent times? Is it fiscally prudent?
DL: Our currency has always been depreciating. The difference between that is moving from one fixed rate to a lower rate (fixed)-devaluation. Whereas if the currency is moving according to market forces we call it depreciation. Of course our currency has been falling relatively because people are selling our currency and buying more foreign goods. But since we don’t produce much, relatively we are not going to export more. Most of their goods are denominated in dollars any way. So if our currency depreciates it is not going to increase the demand for our exports that much. It means that, for now when we are buying goods from outside we need to pay more. So whether that is a good thing or not, really in economics if the demand for your good is relatively price elastic and you depreciate your currency, yes, then you are hoping that the demand for your goods being price elastic people will buy more goods relative to imports.
It depends on the sum of the elasticity of demand for your goods to elasticity of demand for their exports should be greater than one. But I don’t think that the demand for our goods is as price elastic and our demand for their import is relatively price inelastic.
GTB: Analysts predict that the yuan’s devaluation, coupled with a slowing Chinese economy, could lead to slower demand for commodities that have spearheaded Africa’s booming trade with Beijing. This will also shift the balance of trade in favor of Chinese manufacturers, who will be able to export their products at much lower prices.
How does the devaluation of the Chinese Yuan affect the commodities prices from Africa and Ghana for that matter?
DL: The Chinese buy a lot of exports. It all depends on whether we are being paid in Chinese Yuan or dollars. If we denominated our exports in Chinese Yuan, obviously, if we now compare that we are going to get fewer Chinese Yuan relative to U.S dollars then obviously that is not going to be good for us. But it depends on how we value our currency (if we denominate in dollar term and the Chinese Yuan has fallen and the Chinese have to pay us dollars then we are not really affected) it depends on the trade whether we are doing it in Yuan or in other currencies.
GTB: … and demand for African exports into China?
I don’t think so. You don’t see the demand for our exports, that is, our agricultural products to china is relatively price inelastic, they want to buy our goods. It depends on how we denominate our currency. So if we denominate our currency in dollars, the Chinese need to pay more for our goods. If that happen you ask yourself will the Chinese buy more or less? But if the demand for our exports and their imports are relatively price inelastic then it’s not likely to affect us that much because they will not necessarily decrease the demand for our exports that much.
Are we competing with china? I doubt. We don’t produce anything to compete with the Chinese. Textile industry… well, ok, Yes! It will be cheaper to buy textiles, and other goods from china. What’s the volume of our exports? Not that much. The demand for goods that are competitive to that we are producing, yes, the Chinese will become much more competitive. So in that sense the demand for those goods will be relatively hard hit.
According to official government statistics, China’s trade with Africa was more than $200 billion in 2014, three-times larger than US trade with Africa. This is likely to tip in favor of China in coming years, with cheap products from the Asian country choking local manufacturers in sectors like textile.
History
In 2015, China’s economy began to slow a bit too rapidly. The Chinese had been using their foreign exchange reserves to prop up the Yuan against the challenge of a strong dollar. This pushed their currency to appreciate by 14% over the past twelve months. The stronger Yuan led to a drop in Chinese exports: 8.3% in July alone. That month, China’s factory sector experienced its largest contraction in two years, leading to layoffs. Combined with the recent stock market crash, this was too much change, too quickly.
But how will the devaluation be felt in Africa?
China’s devaluation has been fairly modest — about 4% and analysts are predicting prices for African commodities to worsen in the short term then it will see some improvements as the Yuan appreciates. Prices for gold, a major export earner for most African countries like Ghana, DR Congo and South Africa have dipped in recent times due to China’s slowed growth. Ghana’s mining sector saw some dip in performance with AngloGold Ashanti’s Obuasi mine laying off some worker due to slump in gold demand due to China’s slow growth.
Africa will import even more from China. Cheaper Chinese exports will please African consumers while putting Africa’s manufacturers at a further disadvantage. There will be more pressure for tariff protections.
DEFINITION of ‘Devaluation’
A deliberate downward adjustment to the value of a country’s currency, relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is in contrast to revaluation.
BREAKING DOWN ‘Devaluation’
Devaluating a currency is decided by the government issuing the currency, and unlike depreciation, is not the result of non-governmental activities. One reason a country may devaluate its currency is to combat trade imbalances. Devaluation causes a country’s exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less likely to purchase them.
While devaluating a currency can seem like an attractive option, it can have negative consequences. By making imports more expensive, it protects domestic industries who may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.
By: Paa Swanzy-Essuman || www.ghanatalksbusiness.com
