What Does China’s Currency Devaluation Mean for Developing Economies?

By Amy Chang

The Central Bank of China cut the daily reference rate of the yuan by 1.9 percent on August 11, and then twice more in the following two days, resulting in the largest currency devaluation in 20 years. The People’s Bank of China (PBoC) claims that the adjustment was a means of introducing market forces into the yuan, and President Xi has vowed to pursue no further devaluation.  The currency reforms will likely aid China in its bid to have the yuan included in the IMF’s Special Drawing Rights basket, but also comes as Chinese exports and growth stall.

China currency

What are the implications for China’s development projects?

China has laid out a series of ambitious development projects that will require large scale investment, and could be impacted by falling foreign currency reserves.  Foreign reserves plunged by $93.9 billion in August, and a further $43.3 billion in September as exports declined and Beijing took action to stabilize its stock markets and currency. Despite these decreases, China’s foreign currency reserves are still the world’s largest at approximately $3.3 trillion.

The IMF has indicated that $2.6 trillion would be an adequate total foreign currency reserve for China, and the recent outflows should not impede financing for China’s recent spate of outward investment. The New Silk Road is expected to require an investment of  $40 billion, China will provide roughly $30 billion of the $100 billion capital base for the Asian Infrastructure Investment Bank, and the China Development Bank and Export-Import Bank each received an injection of $30 billion this spring. These projects represent significant investment, but should not pose a problem for the world’s second largest economy.

Will this adjustment hurt China’s trading partners?

The devaluation of the yuan will make Chinese exports cheaper internationally. Importers of heavy machinery, bulldozers, and electrical lines such as Ethiopia, Kenya, and Mozambique – all previously experiencing trade deficits due to the high costs of Chinese capital goods – will enjoy lower import costs. Indian firms specializing in the production of electronic goods import components from China, and can also expect a cheaper bill.

China is currently the number one trading partner for most African countries, and the devaluation makes it more expensive for China to import goods.  Many African countries export raw materials and commodities to China, and prices for these goods were already falling amidst slowing global demand.   Copper and crude oil prices both fell four percent to six-year lows, and Zambia’s copper mines have already started laying off workers. A devalued yuan will only contribute to falling Chinese demand for raw material imports.

How will the policy change affect global trade and investment patterns?

The yuan devaluation also means that Chinese exports will threaten to displace goods from emerging market competitors – particularly within the textiles, chemical products, and metals industry. India, already experiencing dwindling exports this year with the rising rupee, has seen export orders being shifted to its neighbor.  Cheaper Chinese goods will likely impact other exporters, in Southeast Asia in particular.

With slowing global demand leading to iron ore and oil prices hitting record-lows before August, commodities exporters to China have seen their currencies weaken in the foreign exchange.  Kazakhstan has seen its exports suffer a decrease of more than 40 percent since January, and the Kazakh tenge saw an accompanying fall in value. Capital outflows from emerging markets are expected to exceed inflows this year for the first time since 1988 due to such exchange rate volatility, pulling $540 billion from developing countries, according to the Institute of International Finance.

This economic slowdown is likely to worsen in upcoming months; this 3 percent devaluation in the yuan will lead to further market turmoil, as capital flows out of Chinese companies when investors start selling their short-US dollar/long-renminbi carry trades.

Amy Chang is a research intern with the Project on Prosperity and Development at CSIS.

Weekly Round-Up

U.S. Development Policy/International Organizations

  • Ahead of this weekend’s G20 summit, World Trade Organization (WTO) members India and the United States agreed to extend a “peace clause” to 2017 allowing India to maintain its food subsidy program. The deal ends a WTO stand-off on trade facilitation that supporters describe as the biggest crisis the organization has faced in its two decade history. Implementation of the trade facilitation agreement would add $1 trillion to the global economy
  • Multilateral banks jointly backed G20 plans for the Global Infrastructure Initiative, a global hub that would share information to help match investors with projects. The Australia-led initiative comes on the heels of the formation of the Chinese led Asian Infrastructure Investment Bank (AIIB) set to launch in 2015.
  • USAID is drafting new internal policy prohibiting future covert, democracy-promotion efforts in hostile foreign countries that reject USAID funds. Recent USAID off-the-books democracy-promotion in Cuba prompted internal review and a critical response from Senators Patrick Leahy, D-Vt., and Jeff Flake, R-Ariz.


Leaders gathered for the  APEC Summit in Beijing this week,

Leaders gathered for the APEC Summit in Beijing this week, but much of the action took place on the sidelines of the official meetings.

Continue reading

Weekly Round-up

This week in development…

  • Indian officials have expressed interest in joining the China-backed Asian Infrastructure Investment Bank, proposed by Beijing last year as an alternative to the Japan and U.S. controlled Asian Development Bank. Indian officials will submit a report with recommendations to Prime Minister Narendra Modi within the next two months.
  • U.S. electric auto manufacturer Tesla Motors announced a new deal with state telecom giant China Unicom to install over 400 electric charging stations in 120 Chinese cities.  The deal comes against the backdrop of new government policy aimed at supporting the development of a domestic electric and hybrid car industry.  China is the world’s largest auto market, and there is pressing need to develop cleaner and more efficient vehicles to meet expanding demand.
Tesla Supercharger stations soon to come to China

Tesla plans to install hundreds of new charging stations around China

Continue reading

The Asian Infrastructure Investment Bank: China’s Pet MDB

By Julia Marvin

In late 2013, President Xi Jinping announced his interest in founding the Asian Infrastructure Investment Bank (AIIB), a Chinese-led development bank that would address the large financing gap resulting from regional infrastructure demands. The Asian Development Bank (ADB) can only produce about $13 billion annually in new loans – just a fraction of the projected $8 trillion needed over the next decade in order to sustain growth. The AIIB, with its $50 billion initial capital endowment, intends to step in and help fill the gap.

Xi and Jim Kim

World Bank Group President Jim Yong Kim meeting with Chinese President Xi Jinping

Chinese Finance Minister Lou Jiwei touted the advantages of a Chinese-led investment bank, saying “Asia is in direct need of investment, especially in infrastructure, but ADB’s current capacity is really insufficient… By comparison, the China Development Bank has been doing commercial infrastructure loans and its business size is far bigger than the ADB and World Bank combined – and that happened in less than 20 years.” The AIIB would initially focus on re-vitalizing the Silk Road as well as general infrastructure needs in the region.

The AIIB is a manifestation of China’s desire to change the status quo of international lending. There is a stark political impetus for this move, especially given the context of the recent BRICS bank announcement.  The ADB and the World Bank are seen as OECD dominated institutions, and China has been one of the leaders in attempting to construct an alternative set of international structures.  China and other Middle Income Countries are eager to pursue the institutional bells and whistles of the developed world, but the type of lending and leadership these institutions will offer remains unclear.

Continue reading