The Central Bank of the People’s Republic of China this week announced that it would change the exchange rate regime of the Yuan Riminbi after maintaining a fixed rate against the US Dollar for nearly 2 years. The China Yuan had previously been pegged against the US dollar in order to support Chinese exporters through the global recession. However, the central bank announced over the weekend that it would allow greater “flexibility” of the Yuan whilst maintaining the daily trading band, which allows the currency to fluctuate by 0.5%. The move comes ahead of the G20 summit, during which the value of the Yuan was likely to be scrutinized. In recent months China have faced a great deal of criticism, predominantly led by the United States, who consider the Chinese currency to be undervalued and thus giving an advantage to Chinese manufacturers. The value of the Yuan has also been blamed for storing up global imbalances in the global financial system and therefore for being a contributory factor to the credit crunch and global recession.
So what does all this mean for expatriates living in China? How will those who receive their income in Yuan be affected by the moves in the international foreign exchange markets? It is largely anticipated that, in the short term, the de-pegging will make very little difference. The main reason for this is that the Yuan has already appreciated and has been allowed to fluctuate against a basket of currencies. As a result of the European debt crisis it has already strengthened by 16% against the Euro so far this year, limiting scope for further any rapid appreciation. The median term forecast of analysts surveyed by Bloomberg news on Monday 21st was for a 1.9% appreciation against the US Dollar by the end of 2010. Such small moves in the relative value of the currency will have a minimal impact on the daily life of expatriates in China.
However, over the longer term, the impact could be significant. Between 2005 and 2008, when China switched from a fixed peg against the USD to a flexible regime, the currency strengthened by 21%. This is a significant move by any standard and does affect the spending power of Yuan earners when they travel abroad. Perhaps of even more significance is the effect on Yuan earners who are saving a proportion of their income. The benefits of many expat packages can lead to significant savings and when expats living in china begin to think of returning home in few years time, they may find that their nest eggs have been supercharged by the effect of this revaluation.
Another consideration for expats is the likely ‘cooling’ effect on an economy. Many economists have postulated that the economy in China has been in an overheating phase for the past 6 – 12 months, with soaring property prices and increased inflation. The revaluation will increase spending power for those buying imported goods and will help to control the inflation that is currently seeping through the economy. The losers are likely to be those in export orientate industries such as manufactured goods and textiles, and some analysts predict these areas could be hit hard due the very narrow profit margins. For expats in China outside these sectors though, the new flexible exchange rate regime is mostly positive news!