China exports slide highlights yuan's strengthening versus Asian currencies
Slide in exports raises doubts about recent strengthening of the yuan
China's bet that it could reap the benefits of a more powerful yuan without paying a price in competitiveness is looking increasingly risky.
An unexpected slump in exports in June marked the latest worrying sign of a slowdown in the world's second-biggest economy and raised the prospect that regulators may be forced to drag the yuan back down after a massive rally this year.
Unfortunately for policymakers, while a weaker yuan might improve the price of Chinese goods sold abroad, it will not be the cure-all for exporters. Other factors are driving up production costs at Chinese companies and undermining their competitiveness abroad.
Still, economic reformers at the People's Bank of China will come under pressure to use exchange rate manipulation to stave off a potentially destabilising round of factory lay-offs.
Liu Ligang, an economist at ANZ bank in Hong Kong, said some sort of adjustment, including pushing the currency lower, was likely since policymakers were behind the curve in dealing with a longer downturn in exports demand than expected.
"PBOC policy needs to be corrected according to the changed external environment," he said.
While the yuan has only risen 1.5 per cent against the US dollar so far this year, it has posted significant appreciation against other Asian currencies, Liu said.
"If you look at the renminbi crosses against the yen, Asian currencies, the Korean won, you see gains of 10 to 20 per cent. It is the crosses that are so worrisome because China has to compete with Asean economies … We may see more lay-offs by Chinese manufacturing as a result."
The currency factor could have a particular impact on China's heavy equipment and shipbuilding sectors, which compete with Japanese and Korean products.
The vulnerability of some Chinese companies was underlined by China Rongsheng Heavy Industries Group, China's largest private shipbuilder, which appealed for financial help from the Chinese government and big shareholders yesterday.
Chinese export figures have been on a roller-coaster ride in 2013, and the currency has played an outsized role. Officials blamed a strong performance in exports earlier this year on speculative inflows of currency disguised as exports, a manoeuvre to get around capital controls. Exports in June declined 3.1 per cent from a year earlier, surprising a market that had expected 4 per cent growth.
But Bank of America Merrill Lynch economists Zhi Xiaojia and Lu Ting said June's fall was due in part to possible manipulation by Chinese customs.
"Customs might have had to deflate trade data in June to neutralise previous over-reporting," they wrote in a research note.