Currency devaluations by China and Vietnam are a symptom of Asia’s deepening “trade recession,” analysts warn. With further downside risks seen, the pressure on policymakers to deliver an economic kick-start is growing rapidly.
On Wednesday, the State Bank of Vietnam (SBV) made its third currency devaluation this year, raising the U.S. dollar reference rate for the Vietnamese dong by 1 percent to 21,890 and widening the trading band to the 21,233 to 22,547 range. The double policy move by the SBV followed its band widening last week in response to China’s surprise yuan devaluation, with Vietnam also worried by the prospect of higher U.S. interest rates.
“After the strong devaluation of the yuan, Vietnam’s domestic market sentiment is still very much concerned about the impact of the U.S. Federal Reserve’s rate increase,” the SBV said in a statement. The reference rate and the trading band are being adjusted “in order to proactively lead the market and pre-empt negative impacts of the possibility that the Fed will increase rates,” it added.
According to Bloomberg News, the dong has dropped nearly 5 percent in 2015, hit by slowing export growth. However, its decline is still well below the slide in currencies of exporting rivals Malaysia and Indonesia, which have seen falls of more than 10 percent.
“Today’s move is a very good policy action,” Le Anh Tuan, chief economist at Dragon Capital Group Ltd. told Bloomberg News. “It will make the currency more competitive and help boost exports.”
Vietnam’s trade deficit widened to $300 million in July on the back of falling exports, which grew by 9.5 percent in the first seven months of 2015 compared to 14.1 percent growth in the prior year.
As reported by Pacific Money, China’s moves to devalue its currency by 4.4 percent last week shocked markets, resulting in the largest one-day decline in the Chinese yuan against the U.S. dollar in a decade. The drop followed a slide in exports, which decreased by 8.3 percent last month compared to a year earlier.
Beijing is reportedly concerned by the risk of further weakness in the world’s second-biggest economy, hit by slumping stock and property markets. Having already eased monetary policy, the currency devaluation is one of the few remaining levers available to the Chinese authorities to stimulate growth.
“By our estimates…the renminbi was 10 per cent overvalued,” Michael Metcalfe, the head of macro strategy at State Street, told Bloomberg.
China’s slowdown to its weakest pace of growth since 1990 has also impacted on its major trading partners, including neighboring Japan. On Monday, the world’s third-largest economy reported negative gross domestic product (GDP) growth of 1.6 percent for the April-June quarter, hit by weaker private consumption and reduced exports to Asia.
Trade data released Wednesday showed Japan’s exports slowed further in July, with the volume of goods shipped falling by 0.7 percent from the prior year, despite a 7.6 percent rise in the value of exports.
“While the United States and Europe are recovering compared with some other markets…China is dragging down exports,” NLI Research Institute economist Taro Saito said.
While Asia’s longer-term growth prospects remain solid, the region has been hit by a “trade recession” amid an “unusually depressed period of global trade,” according to ANZ Research.
“We had been expecting a smooth transition in global growth drivers away from the slowing Chinese economy and toward the U.S. household sector over 2015-16. Alas, it was not to be,” the Australian bank’s economists said in an August 12 report.
“Income fundamentals are improving in the U.S. but the responsiveness of Asian trade to this dynamic has been de-correlated and weak. China’s economic data remains weak and though the RMB devaluation is a broad announcement with many objectives, one of those is clearly additional easing to help stabilize Chinese growth.
“This economic equivalent of relay baton drop has resulted in a further ongoing slowdown in global trade and all of Asia is now experiencing outright negative year-on-year export growth. This is a remarkable outturn relative to Asia’s strong historical trade performance and is suggestive of further ‘breaks’ in the traditional determinants of the Asian trade multiplier.”
In June, India, Indonesia and Taiwan posted double-digit declines in exports, with commodity exporters such as Indonesia and Malaysia particularly exposed to falling commodity prices. South Korea’s exports also dropped by 3.3 percent year-on-year in July, adding to their 2.4 percent contraction the previous month.
According to ANZ, “a substantial downward revision to our Asia growth forecasts is warranted,” with the risks “tilted to the downside.” While India is still expected to post GDP growth of 8 percent through 2017, a deepening of the trade recession could see this drop to 7.5 percent in 2016, with ASEAN’s leading economies also seeing potentially weaker output.
Analysts such as WisdomTree Japan’s Jesper Koll have downplayed the risks of a currency war, stating that China’s desire to make the yuan a reserve currency of choice for Asia precludes further “beggar thy neighbor” devaluations.
But others have warned that the worst is far from over for Asian financial markets, dampened by the prospect of the Fed beginning its long-anticipated monetary tightening.
“The plunge in emerging market currencies will come under only greater pressure, placing enormous downward pressure on prices throughout emerging and developed markets,” warned Christopher Balding of China’s Peking University.
“The real storm will come when the Fed raises rates, sucking capital out of China and other emerging markets. In other words, the real turbulence is yet to come.”
With Asia’s two biggest economies noticeably slowing, time is fast running out for policymakers to revive domestic growth before Washington delivers a potential knockout blow.