The two per cent devaluation of the Chinese yuan poses a fresh risk for the rand as an emerging market.
The global economic turbulence is showing no sign of subsiding as Chinese authorities shifted the rate US Dollar/Chinese Yuan upwards. This took the rate back to levels last seen in 2012.
According to John Cairns who is a strategist and co-head of research at RMB, “The move is an attempt by the authorities to boost the economy through exports. It follows the sharp slowdown in the economy over the past two years and comes after the weak Chinese trade data that was released on Monday.”
Cairns described this economic move as a “small stimulus” for China with a monetary stimulus being likely. “Companies that invoice in yuan will gain from the move. If you import from China and are not already doing it, you should seriously consider yuan invoicing in future,” he added.
Brigid Taylor, chairperson of Kaon Capital, said weakening the yuan by two per cent “is not dramatic”. According to Taylor, this merely raises concerns about how dire the growth is in China to resort to these tactics.
With regard to South Africa, China’s weaker currency will result with it feeding into our export sector. Cairns supported this sentiment and said on a trade-weighted basis, the move will result in a stronger rand.
However, Taylor made it noteworthy that “the rand has weakened across the board” despite Lesetja Kganyago, governor of the South African Reserve Bank saying the rand has weakened because of competitive currency swings.
“The markets are the best languages to see what the underlying issues in an economy are,” explained Taylor. She further cited that our mining sector currently has come under so much pressure, and the cost of production versus what the demand is out there.
“Is there really demand for our commodities? Not really. From a global growth perspective, that’s slowing down specifically when we look at China where there’s been a massive slowdown in the commodity appetite space,” she highlighted.
The risk posed is that South Africa has the upside inflation risk because we are still net importers and with a currency that is that much less valuable, it means our imports cost us that much more, she explained.
On a growth perspective, South Africa has seen opportunity on that dual play of what we have to offer China and what the Chinese can offer us as well as how we position globally to maximise that trade scenario, Taylor offered.