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.

Chinese Investment in Africa – Where Do the Jobs Go?

By Ariel Gandolfo

Chinese official foreign direct investment (OFDI) stock in Africa reached $21.73 billion in 2012, and China’s Premier Li Keqiang stated that total investment will reach $100 billion by 2020. Over 2,000 Chinese companies have invested in sectors such as infrastructure, natural resource extraction, finance, and power generation.

Where the money went: Chinese investment in Africa from 200 to 2011. Source: World Resources Institue

Where the money went: Chinese investment in Africa from 200 to 2011. Source: World Resources Institute

In some cases, Chinese companies are involved in multi-million dollar contracts with multilateral finance institutions. The recent $300 million partnership between state-owned China International Trust and Investment Corporation (CITIC) and the International Finance Corporation to provide affordable homes in African cities is just one example. While few African companies possess the technical skills to build on such a massive scale, African workers can at least take advantage of the employment opportunities that these construction projects generate, right? Continue reading

Weekly Roundup

This week in development…

U.S. Development Policy/International Organizations

  • As the 2015 deadline for the Millennium Development Goals (MDGs) approaches, access to sanitation and safe drinking water remains the ‘least improved’ A recent UN report found that 2.5 billion people lack access to basic sanitation facilities, while 1.8 billion people use contaminated water sources.
A water kiosk in Chipata, Zambia providing clean and sanitary water.

A water kiosk in Chipata, Zambia providing clean and sanitary water.

  • United Nation’s Population Fund (UNPF) recently released a major report on the State of the World Population. The report focuses on the economic potential of the 1.8 billion ‘youth bulge’, referring to the large global youth population many of whom are unemployed. The report estimates Africa’s growth to boost by a third if the continent invests enough in the younger generation. PPD earlier this year launched the Global Youth Wellbeing Index highlighting policies needed to capitalize on these demographic changes.

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Russian Sanctions, Tajik Remittances, and Chinese Investment

By Michael Jacobs

While the situation in Ukraine and its effect on the Russian and European economies have been the subject of countless news stories and op-eds for several months, the implications for the former soviet countries in Central Asia have largely been ignored. One of these countries in particular, Tajikistan, may face the most severe and direct consequences of a Russian economic slow-down.  This outcome looks increasingly likely as falling oil prices amplify the negative impact of economic sanctions in energy-dependent Russia.

Tajikistan, however much it may depend on the Russian economy now, isn’t waiting around to find out what would happen if the Russian economy falters. Tajikistan recently accepted an offer of $6 billion in new investments from China over the next 3 years, which is part of a larger Chinese push into Central Asia. China may use this investment to build oil refineries and has already built numerous cement factories in Tajikistan in recent years as Chinese workers have contributed to a construction boom in Tajikistan’s capital, Dushanbe. These cement factories have also led to some speculation that in the future China may look to fund the completion of the controversial Rogun Dam, which began construction in 1976 and saw work suspended in 2012. The graphs below illustrate Tajikistan’s dependence on Russia as well as the magnitude of China’s recent investments. As a note, comparisons with China’s investment assume $2 billion are invested each year ($6 billion total investment divided evenly over 3 years).

1.  Tajikistan is the Most Remittance-Dependent Country in the World

remittances Continue reading

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.

Asia-Pacific

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.

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