Chinese devaluation of yuan is threat to Russian economy

China shocked global markets by devaluing its currency. Source: Reuters

China shocked global markets by devaluing its currency. Source: Reuters

China’s recent decision to devalue the yuan has sent oil prices down and further weakened the ruble. However, Russian experts say the decline of the Chinese currency in the future will help stabilize China’s economy and cause oil demand to rise.

Beijing’s decision on Aug. 11 to devalue the Chinese yuan to its lowest rate against the U.S. dollar in nearly three years has seen the ruble slide once more: On August 12, the Russian currency fell against the U.S. dollar and the euro, reaching its lowest rate since February.

As sources at Russia’s Ministry of Economic Development told RIA Novosti, the decision by Chinese government to devalue the yuan by 1.9 percent as part of its effort to let the currency float freely threatens Russia’s economy.

“The decision by China’s Central Bank will surely increase the pressure on the currencies of all the developing countries,” the sources said.

 

Currency weakens

The principal consequence of the devaluation of the yuan as far as Russia is concerned is that it affects the ruble by causing oil prices to drop.

“Since China is the world’s largest consumer of fossil fuels, a weaker yuan puts pressure on oil prices, which has an impact on the Russian economy,” said Anton Krasko, chief analyst at MFX Capital.

Following the devaluation on Aug. 12, Brent crude for September fell to $49.22 a barrel on London’s ICE exchange. The strength of the Russian ruble depends directly on oil prices.

In late 2014, Russian authorities also devalued the country’s currency, with the ruble losing almost half of its value against the U.S. dollar and the euro that year. After a 25 percent gain in May 2015, the ruble fell back again in August, losing the gain completely.

According to experts, the main reason for the ruble’s fall is the falling oil prices.

“The Russian currency is in an uncontrollable dive. In contrast, the Chinese authorities have every opportunity to keep their currency stable,” said Krasko.

Nevertheless, the analyst said Russia’s central bank had originally planned to implement a similar policy of controlled devaluation, selling U.S. dollars to support the ruble if it reached the limits of the established currency corridor.

In fact, Russia’s Central Bank sold $27.2 billion in October 2014 to keep the currency afloat.

 

Supporting the industry

The 1.9 percent devaluation of the yuan against the dollar represents the sharpest fall the Chinese currency has experienced over the past 20 years.

China’s central bank pledged to maintain a stable and “reasonable” exchange rate for the currency, while also making it more market-oriented.

In June, Chinese exports declined by 8.3 percent because of the fall in demand from the country’s three largest trade partners: the EU, the United States and Japan.

According to Dmitry Bedenkov, chief analyst at investment company Russ-Invest, the efforts of China to stimulate its economy will be favorable to the world economy in general.

“The good health of the Chinese economy will be especially important for the raw materials markets,” he said, adding that the recent drop in oil prices is partially due to concerns over Chinese growth slowing down.

However, Russia’s regulator expressed hope that China’s decision would eventually help to stimulate the price of oil and boost the ruble.

“In the mid-term, it is to be expected that a weaker yuan will help China to increase exports and stimulate growth. This will eventually have a positive impact on global commodity prices – including oil prices, which in turn will strengthen the ruble,” Russia’s Central Bank said in a statement.

All rights reserved by Rossiyskaya Gazeta.

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