A Simple Guide to China’s Devaluation of the Yuan

What happened?

China devalued the Yuan against the U.S. dollar

 

Why did this happen?

China devalued its currency against the U.S. dollar to make Chinese goods cheaper and boost exports after Chinese exports declined 8.3 percent in July.

 

What does this mean?

The Yuan is loosely tied to the U.S. dollar and has been strengthening as the U.S. economy picks up. The U.S. Fed is considering a rate hike in the near future as the U.S. economy continues to move ahead, thus further strengthening the dollar.  As China is an export-oriented economy, this potential increase would put greater pressure on declining exports.

 

What are the impacts to the U.S.?

A cheaper Yuan will mean a decrease in U.S. exports as Chinese products will be less expensive.  As other nations consider the impact of the Chinese devaluation to their exports, they too may devalue their currencies to remain competitive with the Chinese goods further putting pressure on US exports.

 

What are the Impacts to other parts of the world?

The Chinese currency implications go beyond the devaluation as it’s a symptom of its overall economic health as the Chinese growth engine continues to slow down.  This will have far reaching implications for emerging markets that export heavily to China, particularly commodity exporters heavily dependent on China like Brazil, Russia, South Africa, Indonesia, and Malaysia. A weaker yuan is also a concern for developing nations that compete with China in exporting similar goods and services to similar destinations. Taiwan and South Korea face some of the greatest risks, but Thailand and the Philippines may also be affected and even Mexico may feel the impact of cheaper Chinese goods.

 

All this comes at a time when emerging markets are facing other factors and issues are affecting their growth.  While larger economies are able to sustain and mitigate the Yuan depreciation, China is still the world’s second largest economy, and emerging markets which heavily depend on China are important to the overall global economy. Their health will have an impact on global markets.

 

 

What does this mean for Florida?

 

The Chinese currency depreciation will have an impact on Florida exports, which compete with China.  Florida will need to remain vigilant to the currencies of Florida’s trading partners such as Taiwan and Korea, who are strongly tied to Chinese trade. As their currencies may weaken as well, adding to the fallout of the Chinese devaluation.  The Florida Chamber’s International Program will keep you up to date as this issue unfolds.

 

NEED MORE INFO?

For more information on how this affects Florida’s future, please contact the Florida Chamber’s Chief Economist Dr. Jerry Parrish at jparrish@flfoundation.org.

Africa’s Economy is on the Rise

Seven of the world’s ten fastest growing economies are in Africa. North Africa expects a four to seven percent GDP growth by 2020, while Sub-Saharan Africa expects a six to seven percent growth. Experts project a population boom so large that by 2100, 40 percent of the world’s population will be African. The middle class is expected to triple from 150 million people in 2010 to 490 million in 2040. Africa’s workforce is projected to be 1 billion by 2040, the largest in the world.  Nigeria overtook South Africa as the continent’s biggest economy last year, but South Africa remains the region’s richest, while Morocco is positioning itself to be the business “gateway” for the continent.

While Africa has great potential for growth with increased urbanization and rising incomes, challenges still arise for this emerging nation.

Automobiles:

Africa currently has some of the lowest rates of car ownership – Kenya has just 9 cars for every 1,000 people, Nigeria has 13, Cote d’Ivoire 16, Zimbabwe 45, and South Africa 103.

However, recent investment by automakers shows confidence in the market.

  • VOLKSWAGEN AG resumed assembling vehicles in Nigeria for the first time in 25 years in a bid to foster sales growth in Africa.
  • Peugeot Citroen plans to build assembly plant in Morocco.

Clothing Manufacturing:

Africa is also now seen as the final frontier in global clothing manufacturing.  Low cost labor is one factor but more importantly, African countries can grow their own cotton, which shortens production time- you can go from field to factory all in one place. Ethiopia was recently identified as a top sourcing destination by apparel companies, according to McKinsey & Co.—the first time an African country was mentioned alongside dominant Asian players.  Several clothing giants are starting to source in Africa with more in the works. While it will be many years before Africa can challenge China and other Southeast Asian leaders in this industry, Africa’s prospects look promising.

Ports:

Maersk, owner of world’s largest container liner in Nigerian and Kenyan ports, also has a hand in Africa’s expansion.  Maersk expects a 10 percent growth East African region this year, supported by strong economic growth, increased political stability, a growing middle class and improved efficiency at major ports as Kenya and Tanzania have been increasing investment in their harbors.

Kenya’s economy is expected to grow by 6.9 percent this year and Tanzania’s 7.2 percent, according to the International Monetary Fund.

This growth does not come without its challenges. Growing economies and consumer demands drive the need for port expansion yet, African ports are finding themselves without the land necessary to make such expansion possible.  Increased urbanization has limited the land available around ports, which are now using dredged material and reclaiming land to expand container terminal capacity. This expensive solution highlights the need for Africa to maximize its port and landside capacity to be able to keep up with demand and help support growing trade.

Other challenges still hamper Africa’s potential. Many African countries lack transportation infrastructure to truly leverage these and other opportunities. Workforce is also a challenge. Education and training gaps exists as Africa’s growing economy is not readily adjusting and matching education to jobs and industry needs. Programs to identify these gaps are in development, but are still too few to match growth needs.

Lack of electricity is also a barrier to growth. Weak power grids and unreliable and inconsistent electricity is stunting industries at crucial times, with power outages often stopping production for hours. Nigeria, Africa’s biggest economy last year, is so challenged by its inability to produce enough power that the country mostly runs on private generators.

Power shortages present an opportunity for investment for many countries and private companies, but it may be many years before these investment will yield results.

BRICS Ink $50 Billion Lender in World Bank, IMF Challenge

By Raymond Colitt, Unni Krishnan and Arnaldo Galvao

Leaders of the five BRICS nations agreed on the structure of a $50 billion development bank by granting China its headquarters and India its first rotating presidency. Brazil, Russia and South Africa were given posts or units in the new bank.

The leaders also formalized the creation of a $100 billion currency exchange reserve, which member states can tap in case of balance of payment crises, according to a statement issued at a summit in Fortaleza, Brazil.

Both initiatives, which require legislative approval, are designed to provide an alternative to financing from the International Monetary Fund and the World Bank, where BRICS countries have been seeking more say. The measures coincide with a slowing of economic growth in the five countries to about 5.4 percent this year from 10.7 percent in 2007, according to economists surveyed by Bloomberg.

“The BRICS are gaining political weight and demonstrating their role in the international arena,” Brazilian President Dilma Rousseff said after a signing ceremony.

IMF Managing Director Christine Lagarde congratulated the BRICS on establishing the reserve arrangement and said the Washington-based lender would be “delighted” to work together on the international safety net designed to preserve financial stability, according to an e-mailed statement.

Until the eve of the summit, India and South Africa had vied with China to host the headquarters of the bank, dubbed the New Development Bank, whose membership may eventually be extended to other countries.

Bank Governance

Russia’s Finance Minister Anton Siluanov told reporters that the BRICS decided in favor of Shanghai because the city offers better infrastructure, opportunities to capture private funding, and is home to more investors than the competitors.

Each member country got something out of the deal. The first chairman of the Board of Governors will be from Russia, while the first chairman of the Board of Directors will be Brazilian. South Africa will establish an African regional center for the bank, which may not get off the ground for two years, according to Carlos Cozendey, secretary for international affairs at Brazil’s Finance Ministry.

Founding members have equal voting rights. Of the total subscribed capital, $40 billion are callable shares. Payment of the remaining $10 billion of paid-in shares will be made over seven years.

Unlike the IMF and World Bank, which are managed by Europeans and Americans, the BRICS bank “is quite democratic,” Brazilian Finance Minister Guido Mantega told reporters. Yet the idea is not to compete with the Washington-based institutions but complement them, Rousseff said in Brasilia today on the second day of the summit that includes leaders from Latin America. “We have no interest in giving up the IMF — on the contrary, we we are interested in democratizing it, making it more representative.”

Withdrawal Limits

Each member country has the right to withdraw different amounts from the joint currency reserves, according to a statement from Brazil’s central bank. China can withdraw half the amount it earmarks or $20.5 billion. Brazil, Russia, and India may withdraw the same amount they commit or $18 billion, while South Africa can tap $10 billion, twice its contribution.

“It’s a type of insurance policy,” said Mantega.

The BRICS have evolved from the original term coined in 2001 by then-Goldman Sachs Group Inc. economist Jim O’Neill to describe the growing weight of the largest emerging markets in the global economy. In 2011, South Africa joined to give the BRICS a broader geographic representation.

BRIC Influence

“Separately, all the BRIC economies in the last two years have slowed, so there is quite a lot of attention on the declining economic influence of them,” O’Neill said in an interview with Bloomberg TV India. “But I think that the general Western view is just wrong. Even at the slower rate of growth, they are, their importance to the world continues to rise.”

There are still plenty of opportunities for business, and the newly-created development bank will help those opportunities become reality, said Jorge Gerdau Johannpeter, chairman of Brazilian steelmaker Gerdau SA.

“The bigger the financing possibilities, the bigger the chances of implementing projects,” Gerdau told reporters at the summit.

The biggest winner among the BRICS and its newly created bank may be South Africa, as it stands to gain financial expertise, investment and trade, said Colin Coleman, the Johannesburg-based head of Goldman Sachs Group Inc. in sub-Saharan Africa, who attended the BRICS Business Council meeting.

WTO Agreement

“Arguably we have the greatest amount to benefit because we’re partnering diplomatically and otherwise with some of the world’s most important emerging-market economies,” Coleman said in a phone interview.

While BRICS trade ministers in a joint communique said that member countries stood by the World Trade Organization’s Bali agreement, Brazil’s Trade Minister Mauro Borges said he understood India had certain concerns about its implementation and that the BRICS countries didn’t intend to forge a common stance on the issue.

BRICS share of world exports rose to 16 percent in 2011, from 8 percent in 2001.

Russia also proposed at the summit in the northeastern coastal city of Fortaleza the creation of an Infrastructure Fund during the summit, Kirill Dmitriev, chief executive officer of the Russian Direct Investment Fund, told reporters. The fund could start up as early as next year, he said.

In Brazil, Five Nations Plan Future Together…Again

Now that the FIFA World Cup is over in Brazil, it’s back to business in South America’s largest nation. And in the northeastern city of Fortaleza, leaders from Brazil, Russia, India, China and South Africa made more declarations about how they will become a winning team.

There was more talk about creating a development bank to fund projects in each others’ countries, and declarations on teaming up with mega sporting events. The Summer Olympics takes place in Rio in two short years.

Brazil, Russia, India and China have been meeting together for the past six years. South Africa is only a recent partner in what has become an emerging markets G-5 of sorts, with presidents hammering out growth ideas. Historically, the U.S. and former colonial powers in Europe have been the prime source of funding — and still are. But in the last seven years, for instance, China has replaced the U.S. as Brazil’s biggest market, thanks to soybeans and iron ore. And China continues to invest heavily in South Africa mining. Meanwhile, Russia has been touting its growing relationship with Chinese energy companies looking for natural resources and access to new technologies. On balance, however, the BRICS are still beholden to foreign investment from advanced economies, be it portfolio investors or multinationals based in the U.S. and E.U.

India’s new Prime Minister Narendra Modi is greeted by a representative of the Brazilian government in Fortaleza on Monday. Modi was attending his first BRICS Summit, where he met with the presidents of Brazil, Russia, China and South Africa.

The BRICS leaders said Tuesday that they were now exploring new areas of cooperation, including mutual recognition of university degrees; labor and employment and social safety net policies; foreign policy planning; trade insurance and building a seminar of e-commerce experts to move the five-some in the direction of the advanced economies, which dominate the high tech space.

For followers of the BRIC summits, it was more of the same, with this years theme being about sustainable and inclusive growth. This is a problem especially for Brazil, China, India and South Africa, and more so in China and India where income disparities are worsening.

In a declaration signed by the national presidents on Tuesday, deeper tights were center-stage. “We pledge to deepen our partnership with a renewed vision, based on openness, inclusiveness and mutually beneficial cooperation,” the signed document read. “We are ready to explore new areas towards a comprehensive cooperation and a closer economic partnership to facilitate market inter-linkages, financial integration, infrastructure connectivity as well as people-to-people contacts.

The BRICS continue to face significant financing constraints to address infrastructure gaps and sustainable development needs, particularly in India where poverty is most rampant. The leaders signed an agreement to officially launch the so-called New Development Bank (NDB), a World Bank for the BRICS, with the purpose of mobilizing resources for infrastructure and sustainable development projects in the four countries.

The NDB comes with authorized capital of $100 billion, with the bank’s headquarters in Asia’s new capital: Shanghai.

This year’s summit came with big money announcements.

The countries signed a treaty for the establishment of the BRICS Contingent Reserve Arrangement with an initial size of an additional $100 billion. This arrangement will be used to help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements, according to the declaration.

For investors who thought that China and Russia might open their economies to private enterprise, the declaration shows how the BRICS are firm believers in state owned enterprises. In Brazil, that includes oil giant Petrobras, the country’s biggest company by market cap. In Russia, that’s behemoth banks like Sberbank and gas firm Gazprom. For India, that’s basically ever bank on the mainland, not to mention the oil majors.

The presidents signed an agreement saying that they “encourage our state-owned companies to continue to explore ways of cooperation, exchange of information and best practices.”

Although each country has different problems, it was clear by reading the 72 paragraph declaration that each country had its input: from Russia being lauded for its role in hosting the G-20, to China reaffirming its interest in human rights.

Brazil-BRICS Trade: A Visual Breakdown

By Elizabeth Gonzalez

On July 15, several of the world’s most powerful emerging market leaders will meet in Brazil. Heads of state from the five BRICS countries—Brazil, China, India, Russia, and South Africa—will convene for the group’s sixth summit.The meeting marks the first official visit to Brazil by both Chinese President Xi Jinping and Indian Prime Minister Narendra Modi. The trade bloc, which first began heads-of-state summits in 2009, brings together a group of markets that the World Bank estimates will account for the majority of global growth by 2025. Ahead of the meeting, AS/COA Online zeroes in on the Latin American country’s trade relationship within the bloc.

China dominates trade relations among the BRICS, according to Brazil’s Ministry of Development, Industry, and Foreign Trade. In 2013, the value of China-Brazil trade was more than nine times larger than Brazilian trade with India—the Latin American country’s second largest partner within the group.

Click here to see the visual breakdowns.