Devaluation of the yuan: what threatens Russian business. Devaluation of the yuan: what threatens Russian business Chinese yuan - what is it
Some Russian economists doubt the possibility of a sharp devaluation of the Chinese currency. Photo by Reuters
China cannot avoid a 30-40% devaluation of the yuan against the dollar in 2016. This forecast was made yesterday by scientists from the Russian Economic University (REU). G.V. Plekhanov. The Chinese economy does indeed give cause for concern. But, according to experts interviewed by NG, a devaluation of 30–40% is too bold a forecast. The sensation of the year was the depreciation of the yuan by only 2% against the dollar. The collapse of the yuan will bring problems to both China and the Russian Federation, which is switching to mutual settlements with China in national currencies.
If Beijing wants to maintain strong economic growth and foreign trade, it will have to accept an unprecedented depreciation of the yuan next year. Experts from the Russian Economic University warned about this. G.V. Plekhanov.
“China will not be able to maintain the exchange rate of the yuan, which will inevitably have to devalue against the US dollar by 30–40%... The external and internal pressure of the crisis is simultaneously increasing in China, which makes maintaining the yuan too costly. In 2016, the authorities may resort to a sharp and significant devaluation,” predicts Ruslan Dzarasov, head of the Laboratory of International Political Economy of the Russian Economic University. In his opinion, now this is almost the only way for China to stimulate its exports.
Moreover, Beijing may not have enough reserves to support the national currency for a long time - especially when the Chinese authorities are already spending money to help the stock market. “The yuan is under great pressure from the external debts of Chinese companies. In 2015, payments for them should amount to 700 billion, and in 2016 – 900 billion dollars. In total, this leads to a reduction in gold and foreign exchange reserves. From $4 trillion in 2015, they fell to $3.4–3.5 trillion,” laboratory employee Vasily Koltashov also clarifies.
The Chinese economy is indeed a cause for concern. Its growth is slowing down, and foreign trade turnover indicators are deteriorating. As Reuters reported yesterday, China's trade statistics for October disappointed analysts. According to the General Administration of Customs of China, China's exports in October fell in dollar terms by almost 7% compared to October last year, and imports by about 19%. This is worse than analysts’ forecasts: they expected that exports would decline by 3% year-on-year in October, and imports by 16%.
However, a devaluation of 30–40% is still too bold a forecast. Especially if we remember that this year a real sensation was the decision of the People's Bank of China (PBOC) to lower the official exchange rate of the yuan against the dollar by almost 2% on August 11, then by about 1% on August 12. Even such a slight depreciation was presented by the news agency as “the largest devaluation of the yuan in 20 years.” After all, the NBK has artificially maintained the official exchange rate of the yuan to the dollar in recent years.
According to experts interviewed by NG, a significant devaluation of the Chinese currency is unlikely. “In addition to economic growth, Beijing has another strategic goal - to make the yuan the world's reserve currency. A sharp devaluation will undermine confidence in China's currency. Beijing may accept some depreciation of the yuan to support exports, but it will be meager,” says Alexander Razuvaev, director of the analytical department of Alpari.
At the same time, Alexei Maslov, head of the Department of Oriental Studies at the Higher School of Economics, explains that the Chinese economy has now entered a period of cyclical crisis associated with distortions in the structure of economic growth, which was ensured primarily through investment in the main sector, rather than an increase in consumption. Today, investments have decreased, as the Chinese economy as a whole has become more expensive, Maslov notes.
Earlier, NG already wrote that the “rise in price” of the PRC economy is associated with the growing costs of enterprises for labor, for increasing wages and benefits, and this leads to the fact that many countries are now investing not in China, but in the cheaper economy of Vietnam, Indonesia, India, Philippines (see “NG” dated 09/02/15).
The devaluation of the yuan will not solve all these problems, Maslov believes. He recalled that the yuan grew against the dollar during 1994–2014: “The rate changed from 8 yuan per 1 dollar to approximately 6–6.4 yuan per 1 dollar.” “The yuan rose in price because Chinese industry grew. As Chinese industrial growth slowed, the PBOC began devaluing the yuan. The exchange rate reflects the situation in the Chinese economy. Should we expect a 30–40% decline in Chinese industry next year? I don’t think so,” says the expert and adds: “Rapid devaluation will lead to tragic consequences for China: an investment collapse, mass ruin, social unrest.” Beijing certainly cannot allow this.”
But most importantly, experts warn about the negative consequences of the devaluation of the yuan, even less significant than 30%, for Russia. “If the Chinese weaken their currency, then exports from China will flow to us, their goods will be cheaper. We are trying to switch to national currencies in mutual settlements with China. This means that the export revenue that will be in yuan will be cheaper for us due to the exchange rate difference. In addition, the Ministry of Finance is going to issue federal loan bonds in yuan. The devaluation of the Chinese currency will hit the attractiveness of such securities,” explains Alexander Razuvaev.
In turn, Alexey Maslov believes that Russia is not ready for the economic fluctuations of its strategic partner. Maslov gives an example: let’s say, when the ruble fell in price against the dollar and other foreign currencies, the Russian Federation had the opportunity to sell its products to China. Paradoxically, it has become profitable to sell products from the textile industry, small mechanical engineering, and construction materials there. And this could be done primarily by the territories bordering China.
“It turned out that in Russia there are no products in such quantities that can be sold to China,” Maslov clarifies. “There are no corresponding industries in the border areas, and it is unprofitable to transport these goods from the central regions.”
And now, as Maslov says, due to exchange rate changes, Russia will not be able to solve the problem of import substitution at the expense of China, a number of joint infrastructure projects are under threat of failure, and the resolution of the price issue on gas contracts is also being delayed.
The Yuan is the national currency of the People's Republic of China. The rapid development of diplomatic relations between China and Russia has led to the fact that not only professional financial analysts, but also ordinary citizens of our country began to show interest in the dynamics of changes in the exchange rate of the yuan, which just a few years ago was considered a rather rare currency in our country.
Moreover, the leadership of China and Russia have long been discussing the project of switching to mutual settlements in their own national money, abandoning the use of the dollar. How has the ratio of Russian and Chinese currencies changed over the past five years, and what fluctuations in the yuan exchange rate should we expect in the near future?
Yuan to ruble: dynamics over 5 years
At the beginning of 2011, the yuan exchange rate was fixed at 4.6 rubles, and by the end of the year it increased to 5.11 rubles; while the relative growth of the Chinese national currency was 10.9%
In January 2012, one yuan cost about 5.04 rubles; in December of the same year, its average cost decreased by 3.5% and amounted to 4.87 rubles.
The beginning of 2013 was marked by the establishment of the yuan exchange rate at 4.88 rubles; at the end of the year its value reached 5.39 rubles. The growth of the yuan against the ruble amounted to 10.5%.
At the beginning of 2014, the yuan exchange rate approached the value of 5.39 rubles, and at the end - 9.07 rubles. In percentage terms, the value of the Chinese currency increased by almost 68%. Such a sharp jump in the yuan exchange rate was due to the introduction of European and American sanctions against Russia, which caused a rapid decline in the value of the ruble in relation not only to the euro and dollar, but also to other currencies.
In 2015, the cost of one yuan fluctuated between 8 and 11 rubles. At the end of the year, due to another weakening of the Russian currency, the cost of one yuan approached the 12 ruble mark.
At the beginning of 2016, the yuan strengthened its position against the ruble, as a result of which the value of a unit of the Chinese currency consolidated at 12.71 rubles.
Despite the significant fluctuations characteristic of the ruble-yuan ratio, the Chinese currency maintained its position in its own country until recently. That is why, according to experts, we should not expect a significant change in the ratio of the yuan to the ruble in the near future.
Despite the fact that the national currency exchange rate, depending on the cost of oil prices, changes within 2-3 rubles per dollar, the value of the yuan also undergoes some changes, and not always favorable.
Thus, according to information provided by the Chinese Central Bank, in July 2016, the yuan exchange rate fell to the lowest level recorded since December 2010. For one dollar you can now get 6.6594 yuan; or, in terms of Russian currency, 10 rubles per yuan. And if before the rapid growth of the dollar, such a low value of the yuan could lead to its depreciation for Russian citizens, now, compared to 2010, the difference in the value of the yuan and the ruble is more significant. In fact, it is not due to the rise in price of the Chinese currency, but to the depreciation of the Russian currency.
The main reasons why the yuan exchange rate is relatively stable are:
- a large volume of exports of goods produced in China;
- the influence of the Bank of China on the value of the national currency and, if necessary, its artificial stabilization;
- low level of dependence of the Chinese economy on the influence of other countries;
- lower prices for oil, which China buys in large quantities.
However, it is worth noting the unfavorable factors that have a negative impact on the Chinese currency:
- China's large external debt;
- a sharp reduction in foreign exchange reserves and capital outflow from the country.
Yuan to ruble: forecast
According to most experts, the Chinese authorities will not be able to avoid the devaluation of the yuan in the near future. At the beginning of 2019, there were many assumptions that by the summer of 2019 the Chinese national currency would depreciate at least twice. This will not only preserve the country’s foreign exchange reserves, but also partially repay external debts, spending much less of its own funds on this procedure.
However, government officials say that there is no need to devalue the currency and, as a result, no actions will be taken to “drop” the yuan.
If the words of representatives of the Chinese authorities turn out to be close to the existing reality, the likelihood of serious fluctuations in the exchange rate of the yuan against the ruble will become very low. Thus, according to experts from the Russian agency APECON, at the beginning of 2018 the yuan exchange rate will be fixed at 9.1 rubles, and at the end - 10.46 rubles. In 2019, the yuan exchange rate will fluctuate between 9.95 and 12.94 rubles.
A group of analysts from the Prognozex bureau assumes that in 2019 the yuan exchange rate will change from 9.32 rubles at the beginning of the period to 11.08 rubles at the end. In 2020, these values will change to 10.4 rubles and 10.66 rubles, respectively.
So, over the past five years, the yuan exchange rate against the ruble has more than doubled - from 4.42 rubles to 9.84 rubles per 1 yuan. An important role in such a significant jump in the value of the Chinese currency was played by the sharp weakening of the ruble against the backdrop of sanctions imposed by the European Union and America against our country in 2014.
However, analytical reports compiled on the basis of information about fluctuations in the exchange rate of the yuan against the dollar show that the Chinese currency is losing ground, and its value on the world market is gradually decreasing. However, according to many experts, in the future the yuan deserves trust from both investors and the world community as a whole. This is due to the fact that the Chinese economy has great potential for further growth, and the yuan can receive the status of a leading currency and, subsequently, be used for settlements on world markets along with dollars and euros.
The Chinese currency continues to be in a fever. After the turbulence of the first days of the new year (the yuan fell from 6.49 per US dollar on December 31 to 6.59 by January 9), the rate has remained relatively stable in recent weeks at 6.57. Only once, on January 31, did the yuan break through 6.6 per dollar. Compared to the surges that began in August after the exchange rate formation mechanism changed (from August 10, the yuan fell from 6.2 to 6.4 in two days), now there has been a period of slight calm.
However, these numbers should not reassure anyone. While watching the yuan exchange rate, you should at the same time closely monitor the dynamics of the reserves of the People's Bank of China (PBOC).
But here everything is quite alarming.
According to data published on February 7, reserves fell by another $99.5 billion, to $3.23 trillion, updating the May 2012 minimum. And although the dynamics of the decline in reserves has slowed down slightly (a record drop of $107.9 billion was recorded in December), the trend is clear - Beijing is selling dollars to stabilize the national currency.
China's monetary policy was one of the key issues at all Chinese sessions of the World Economic Forum in Davos. Vice Chairman of the People's Republic of China Li Yuanchao (No. 8 in the official Chinese hierarchy) did his best to assure investors that China does not pursue the goal of devaluing the yuan. And the deputy head of the Securities Market Commission, Fan Xinghai, who is part of a small leadership group on financial and economic issues and, according to rumors, close to Chinese leader Xi Jinping, admitted that Beijing’s main problem is its communication strategy. According to Fan, China is not going to devalue the yuan against the dollar, but to take as a reference a basket of currencies of 13 key trading partners (the ruble is also included), but the NBK has not yet been able to clearly explain this to the market. “We will learn!” - he promised. True, many informed Chinese and Hong Kong financiers doubt that the authorities have a clear strategy - there are too many forces now that are interested in pursuing diametrically opposed exchange rate policy options.
One of the key questions: how will the actions of the NBK affect the outflow of capital from China, which is breaking new records? And what will Beijing do to combat this problem? So far, investors, fearing the depreciation of the yuan and the slowdown in the Chinese economy, are trying to sell assets denominated in Chinese currency. At the same time, Chinese rich people are withdrawing money from the country, fearing for the safety of their funds due to the slowdown in the economy and the growing anti-corruption campaign. Bloomberg Intelligence estimates that capital outflows totaled nearly $1 trillion last year.
The NBK's options for action are not the most pleasant.
Or we must continue to fire our reserves, demonstrating our readiness to stay the course. Or finally let the currency float freely - with the risk of causing a sharp fall and uncontrollable panic. Or tighten controls on the capital account, which China was weakening in order to include the yuan in the IMF's Special Drawing Rights (SDR) basket - my colleague from the Carnegie Endowment's Asia program, Huang Yukon, is confident that Beijing's hasty actions in pursuit of prestige largely led to the current disastrous consequences .
Most insiders think that Beijing will “follow the middle path” or “limit itself to half measures” - the interpretation depends on how much respect a particular commentator has for the once unshakable authority of the PRC financial authorities. In any case, many market participants believe that the yuan will weaken, and these expectations will push the Chinese currency down.
What does the Beijing currency drama mean for Russia?
Not much yet. The share of trade in national currencies, despite all efforts, is growing very slowly during the crisis. Last May, Vladimir Putin spoke about 7% of trade turnover being serviced directly through the ruble-yuan pair. In a recent interview with TASS, Russian Ambassador to China Andrei Denisov said that now this share is 8% (it must be taken into account that in 2015 trade turnover fell by almost 28%). If last year companies like Gazpromneft announced that they would accept yuan as payment for oil supplied to China, generating a wave of joyful comments about the imminent collapse of the petrodollar, now such experiments will clearly be frozen for the time being.
The world has become well-versed in dealing with dollar volatility, but instruments for hedging yuan-related risks remain expensive.
The Central Bank, which has announced its readiness to include the yuan in Russian reserves, will certainly be very careful when choosing the time to enter into yuan assets. Well, the currency swap between Moscow and Beijing, which never started working due to the volatility of the ruble, will obviously not be printed anytime soon due to uncertainty about the future of the yuan.
However, the negative news for Russia may not stop there. If the Chinese currency weakens significantly, tourists from the Middle Kingdom will be able to leave less money in Russia, and the yuan risks losing its status as the third most popular currency in VTB24 exchangers. The flow of tourists sweeping cheap goods off the shelves will be reduced, not only in the Central Department Store, but also in the Far East.
There are also more negative scenarios. For example, if the PBOC, contrary to the statements of Chinese officials, does not learn to explain its actions to the world, central banks in other countries may interpret Beijing's actions as an attempt to gain a unilateral advantage and begin a competitive devaluation - this is what my Beijing-based colleague Michael Pattis fears. This means that a sales season may begin on global markets, including commodity markets, the consequences of which for our country are quite understandable.
The rapid development of the Chinese economy in recent years, as well as the expansion of Russian-Chinese relations, has led to the fact that ordinary Russians and financial analysts have become increasingly interested in the yuan, which previously most of our compatriots classified as exotic currencies.
In addition, this monetary unit is increasingly showing itself on the world market. Some countries have even switched to settling with China in this currency, and most recently it was included in the IMF basket. Let's find out the forecasts for the Chinese yuan to ruble exchange rate for 2018 from experts.
Currency of China
To better understand this issue, it is necessary to find out what the yuan is and what place it occupies in the world market.
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Initially, the main reference point for the formation of the exchange rate of this currency was the pound sterling, but from 1994 to 2005 a rigid peg to the US dollar was used. In 2005, the Bank of China abandoned the hard peg and began to form quotes based on a currency basket, which, in addition to the dollar, includes:
- yen;
- GBP;
- Euro;
- partner currencies (won, ruble, Canadian dollar, etc.).
Considering that at that time the Chinese economy was demonstrating unprecedented growth, this measure yielded positive results. The yuan exchange rate has been steadily rising.
However, regardless of the fact that the quotes of the Chinese currency are increasingly influenced by market factors, the Chinese authorities have not completely abandoned administrative control of the exchange rate. Thus, due to the slowdown in economic growth in 2015, the national currency was artificially devalued (depreciated) several times in order to stimulate economic processes.
In addition, the collapse on China’s stock exchanges, which began in mid-2015, is also not happening by itself. Therefore, even such negative factors as a slowdown in economic growth and a collapse on stock exchanges did not prevent the IMF from including the yuan in the list of reserve currencies in the fall of the same year, since the national currency of China, like the Chinese economy as a whole, has very high potential.
Quote dynamics
Now let's find out how the yuan and ruble interact. This is all the more interesting considering that Russia and China have long been planning to switch to mutual settlements in national currencies, abandoning the dollar.
According to the Central Bank of Russia, the price of 1 yuan throughout almost the entire 2016 fluctuated between 7.9 and 11.2 rubles.
In January 2018, the growth dynamics of the yuan against the Russian currency stopped slightly and the rate fixed at 8.73 - 8.87 rubles per 1 yuan.
Forecasts for 2018
Now let's find out the forecasts of leading economic experts about what the Chinese yuan to ruble exchange rate will be this year.
According to most experts, quotes for the Chinese currency against the ruble will remain at the level of 8.2–9.7 rubles throughout the first half of the year.
Let's look at the forecasts of analysts at leading Russian banks at the end of 2018.
As we can see, only the indicator of Vneshprombank stands out from the framework of the above-average forecast for the exchange rate of the Chinese yuan to the ruble at the end of 2018. Its experts believe that by the end of December the Chinese currency will cost as much as 13.8 rubles. The lowest predicted cost from VTB experts is 9.68 rubles.
What should Russians do?
At first glance, it may seem that the information we provided above will be useful only to traders and people who make professional money from the difference in quotes. But it is not so. In light of economic sanctions and tense relations with the United States, the dollar has ceased to be an ideal option for savings (as it was previously). And storing your funds in rubles has long been quite risky.
Taking this into account, creating savings in yuan looks increasingly attractive. Russia and China have quite close partnerships. Trade turnover between the countries at the end of 2016 amounted to $68.06 billion. The economy of the eastern country, despite some slowdown in 2016, is capable of recouping losses with interest in the future. The main thing is that absolutely all experts predict an increase in the value of the Celestial currency against the ruble by the end of 2018 in comparison with current indicators.
The crisis in Russia is beginning to gradually slow down, which is manifested by the stabilization of the foreign exchange market. The dollar exchange rate is strengthening, albeit not in the positions it previously occupied, but in addition to the value of the American currency, many today are interested in the yuan forecast for 2016. There is nothing surprising in this, because in light of recent events, relations between China and the Russian Federation are becoming “closer”, and the governments of these two countries want to conduct financial settlements with each other in their own currency, abandoning the use of dollars.
Chinese Yuan - what is it?
The Chinese yuan (although few people know about this) is not only the main monetary unit of the People's Republic of China, but is also part of the group of the world's main reserve currencies. In fact, this monetary unit is the main competitor of the dollar, but if we face the truth, it is unlikely to completely replace American money; it is still worth talking about it in more detail. The yuan is not subject to free conversion and its value is very strongly influenced by the dollar, that is, the latter is able to influence the decision made by the Chinese People's Bank about its value.
The Chinese authorities are well aware that it is beneficial for them to lower the value (in order to increase exports) of their national currency, while the whole world strives to increase it, because this has a direct impact on exports and the state of the economic system. It’s not in vain that experts are trying to calculate the exchange rate of the yuan to the ruble, because many secretly hope that Chinese money will still be able to “improve” the authority of the dollar.
Today China, whose GDP is 10%, is a very profitable partner for many countries, but the authorities of this state have relied on Russia. Naturally, this situation cannot be considered completely simple and there are several points in it that you need to know about, but we can say for sure that many consider such a union to be very successful. Naturally, it is not worth assuming that the Chinese currency will be able to completely replace the dollar, because American financial units have been considered international for many years, but it is probably worth keeping in mind that this is possible.
Experts predict that the yuan/ruble exchange rate for 2016 will undergo big changes. Financiers argue that the ruble has everything to restore its position in the country’s domestic market, because its stability recently cannot be ignored. If we believe the favorable scenario for the development of events, then at the end of the year the ruble will be able to strengthen even more, but this will happen only in the absence of additional sanctions from Western countries and subject to a competent foreign economic policy.
You shouldn’t get your hopes up with dreams that the crisis is completely over, because the Russian Central Bank is making incredible efforts to maintain the stability of the national currency and stimulate the economy. The head of the Central Bank is fully convinced that a reduction in the key rate could have a detrimental effect on the state of the ruble, especially since the banking sector today is extremely active in using currency repo. The latter fact, by the way, indicates that the demand for foreign exchange resources is growing, because in the last year alone, with the help of repo, the Central Bank was able to earn more than $27 billion.
All these factors strongly influence each other and have a certain impact on the forecast of the yuan in Russia, because any fluctuation of the currency in the country’s national market can affect the state of other monetary units that are used for making payments on its territory.
What is the forecast based on?
There are a number of certain factors that, according to preliminary calculations, will cause the growth of the Chinese currency, and these include:
- growing demand for its purchase among the population;
- reduction in the cost of oil (China is a fairly large consumer of petroleum products, so its currency has a direct impact on the ruble);
- improving socio-political relations between China and the Russian Federation.
Forecast of the yuan against the ruble
When forecasting the yuan/ruble exchange rate for 2016 in Russia, experts claim that its value will not rise above 10 rubles per Chinese monetary unit. The peculiarities of this currency include stability, which the state maintains “soft” and. most importantly, controlled devaluation. The PRC budget includes a predicted fall of the yuan by 5% of the value of the dollar, because it depends on it, but it is almost impossible to predict its value depending on the price of the dollar.
Financiers and analysts have no doubt that the Chinese yuan forecast for 2016 will be almost the same as today, and if the economy faces a rapid recovery from the crisis (which is unlikely), the strengthening of the ruble will become more noticeable.
The Chinese economy is considered the largest in the world, therefore, it influences the economies of other countries, therefore, fluctuations in its currency simply cannot but affect the state of the ruble and other currencies of the world. Moreover, it is not for nothing that China is considered the largest consumer of raw materials, and in modern times Russia is considered one of its largest partners, which means that it is beneficial for the Russians to conduct partnership-monetary relations with the Chinese in a currency convenient for both parties, bypassing the dollar.
It is still unknown whether the yuan will be included in the currency basket along with the dollar, euro and sterling, because during the crisis of 15 it was not possible to do this, however, as Alexander Osin, director of the Savements company, says: “The whole world needs it today.” .