Yesterday, the People's Bank of China cut the value of its currency for the second day in a row. Analysts now estimate that the yuan has depreciated more than 3 per cent against the US dollar, having already dropped 1.8 per cent when China "threw a curveb
Markets around the world are reacting with increasing anxiety. Yesterday, the Dow Jones Index dropped 212 points, NYEX was down 4 per cent, the S&P 500 tumbled 20 points, European stocks fell 1.6 per cent, while the price of oil and copper dropped 4 and 3 per cent respectively
Basically, what China is doing is exporting deflation. That means shrinking demand and diminishing purchasing power across the globe. In recent years, China’s GDP has grown at an anaemic rate of less than 7 per cent after years of double-digit boom. Beijing has responded with all the traditional antidotes against deflation, including monetary and fiscal stimulus policies and interest rate cuts. When those measures failed to stop the slump, the devaluation of its currency was the unavoidable remedy of last resort.
Investors are now concerned that China’s economy is even weaker than anyone could have guessed. As such China may start pulling back on purchases of goods and services from other countries. In the US, whose currency is strengthening in reverse proportion to the weakening yuan, manufacturers fear for their already weakening export prospects, and the stronger dollar will make the competition even tougher.
Bank of America’s preliminary analysis pointed out another significant ramification of the yuan depreciation besides the worldwide deflationary pressure – a foreign exchange currency war. Traders are betting heavily that the yuan will continue to fall, and the risk premium is being built into the yuan spot market. Central banks in several countries might follow China’s lead and devalue their currency too. Already, anger is being expressed in Washington, where lawmakers are accusing China of playing currency-manipulation tricks on them.
With China’s growing stature as a world economic powerhouse, the yuan is now part of the global economy’s fabric. In the global village in which we all live, when China sneezes, the rest of the world catches a cold. For a small developing economy like Thailand, the cold could turn into pneumonia and cause havoc.
Two years after China devalued its currency in 1994-5, Thailand suffered its nightmarish Tom Yum Kung financial crisis. In the last days of the 1997 crisis, our exports experienced zero growth despite signs to the contrary which were the result of VAT fraud. Our current account deficit at that time brought down the exchange rate regime that had been rendered unsustainable.
Are we about to suffer a repeat of the economic meltdown in 1997? Not quite, but the outlook is gloomy.
Our exports are in the red, and the colour is turning crimson. With the world experiencing deflation that China is exporting, we will see further shrinkage of demand and purchasing power from the markets for Thai products. The recovering EU markets will turn to our Asean neighbour, Vietnam, which has just concluded a free trade agreement with the Europeans. We have no new markets and no niche products to give our exports a boost.
Tourism, our No 1 foreign exchange earner, will likely suffer due to shrinking purchasing power and disposable income among the Chinese, who constitute the largest portion of our visitors.
The baht will likely fall more steeply than expected, for several reasons.
The Bank of Thailand (BOT), in its attempt to keep the baht low without lowering the interest rate, has erroneously embarked on further financial liberalisation. Today, a Thai can send out US$5 million per day as opposed to $500,000. Well-to-do Thais are now allowed to remit $50 million per year to purchase property overseas, as opposed to $5 million. With the uncertainties around the baht’s future value amid the yuan’s devaluation, money will flow more freely out of Thailand, bringing added pressure to devalue the Thai currency even further.
The BOT has also allowed a higher quota for short-selling the baht – up from Bt300 million to Bt600 million. This will add to the volatility and helps neither the baht nor our financial health, especially at a time when we need more stability.
Thai exports will become increasingly less competitive in the world markets under our current exchange rate regime. Further contraction in export revenues will hit our balance sheet and hence our foreign exchange rate.
And for a double (or triple) jeopardy, Thailand will find that ignoring the Trans-Pacific Partnership (TPP) trade deal negotiations will come back to haunt us. Mexico has called for a TPP “rule of origins” that would prohibit TPP members from sourcing products from non-TPP countries. Japan, a major player in the TPP, buys lots of automobile parts from Thailand. If the TPP’s rule of origins kicks in, Japan will have to look elsewhere for automobile parts suppliers and shift its investments in this sector away from Thailand.
Analysts at HSBC estimate that there is about 1 trillion yuan waiting to be sent overseas by wealthy Chinese and Chinese corporations, and it’s taking place every single day. The US will be an important destination for the drain. That enormous outflow of capital will add to the deflationary trend of the Chinese currency, and hence of the baht.
While our high-net-worth individuals and large corporations will always be able to weather the financial maelstrom, it is our farmers, small and medium-sized enterprises and middle class that will be hit in the pocket. They will find their purchasing power dissipating by the day. In direct proportion, the majority of the population will become more vulnerable and disenchanted.
And the worst part of it all? There is nothing we can do to avoid the suffering. The eleventh hour has passed and we have missed the rescue trains.