The trade war between the US and China rumbles on and China unexpectedly took things up a gear at the beginning of August by employing another weapon in its armoury: the yuan. China’s central bank took the decision to devalue its currency by almost 2% against the US dollar not once but twice, bringing its daily reference rate to under 7.05 per dollar for the first time in a decade. The US Treasury immediately dubbed China a currency manipulator and Trump has resorted to Twitter accusing China of ‘playing currency games.’
The devaluation was in response to falling exports which took a hit in July falling by 5.6%. This was the biggest drop since March, although output has been weakening for over a year and is set to fall further when Trump’s latest 10% tariffs on $300bn of Chinese imports are imposed from 1st September 2019.
The yuan loosely tracks the dollar so has strengthened as the greenback has been appreciating. That has made Chinese exports more expensive than those of its neighbours such as South Korea and Japan. The devaluation has sought to address this and give China a competitive trade advantage.
Stock markets worldwide tumbled following the surprise move and currency markets went into overdrive. Some economists have pointed out that devaluation makes it more expensive to pay back debts in foreign currencies, and that China has a whole heap of debts. Could this be the start of a debt crisis which could trigger the next financial crisis? That has been suggested by some experts but only time will tell.
While devaluation makes Chinese goods cheaper abroad and will hopefully boost exports, those living in China are less likely to feel any direct positive effects of devaluation. On the contrary, locals and expats alike who are earning in yuan will effectively see a decrease in value of their salaries which will inevitably impact spending power, savings and investment.
While higher earning expats and those with savings in their own currencies may be protected to a degree, those on lower salaries, for example in the education sector or those with small businesses, bars and restaurants, could struggle more. And for those using Chinese salaries to pay for mortgages or other debts back home, it’s definitely not good news.
The weakening yuan also makes imports to China more expensive. This could help local industries if consumers switch to purchasing locally produced products. Take tourism for example. Even prior to this latest devaluation there had been a decline in spending by Chinese tourists abroad. With the yuan falling in value tourists from China are increasingly likely to scale back travel plans and choose less expensive options triggering a shift in demand for travelling abroad in favour of domestic travel.
So should expats living in China be worried? While there is no cause for panic, now would certainly be a good time to meet with your financial adviser and see if you need to make any changes to your financial planning in response to the devaluation. It might be time to put at least a part of your savings into a reserve currency or to bolster any overseas savings that you already have. If you don’t have an offshore bank account, consider opening one and now is a good time to start paying careful attention to exchange rates if you don’t already. You will keep transfer fees to a minimum by using a currency exchange specialist.
When it comes to investments, the advice remains the same as it always is, maintain a well diversified portfolio to spread risk and don’t make any panic-led decisions in response to what you read in the media. This too shall pass!
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