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Sunday, March 27, 2016

China slowdown: Would Bangladesh gain or lose?

Suborna Barua and Hasib Ahamed

Chinese devaluation of the Yuan delivered a temporary shock to financial markets, but its longer-term effects may be felt around the globe. The devaluation signals that the economy is not as strong as it was hoped. Beijing spent much of the last year propping up the Yuan to combat capital outflows, avoid debt defaults and win a place among the International Monetary Fund's five reserve currencies. But with growth sputtering and deflation looming, China has now in a reversed course. It has devaluated its currency by 3 per cent against the dollar during August 11-13. The fall of Renminbi (also known as Yuan; although officially known as Renminbi, meaning 'The People's Currency', was largely a result of technical adjustment by the People's Bank of China (PBoC). It was aimed at determining the daily reference rate of the Renminbi against the dollar in the interbank foreign exchange market. According to the new policy regime, the daily reference rate is set based on the previous day's closing rate rather than fixed by the PBoC, thus allowing the market to play a bigger role in determining the exchange rate. The daily trading band around the central reference rate remains 2 per cent. However, as this move followed the release of July data showing weaker growth of retail sales and industrial output and merchandise exports dropping by 8.3 per cent (in value terms), the depreciation of the Yuan is also interpreted by many analysts as a policy to stimulate the economy. The IMF described China's latest exchange rate regime change as a 'welcome step'.

The adjustment of the exchange rate regime in China and the subsequent fall of the Yuan against the dollar may have some global implications. First, there will likely be a direct impact on those trade partners whose export sectors have become increasingly dependent on China. In 2014, merchandise exports to China accounted for 10 per cent of global export values, up from 3.5 per cent in 2000. Some country groups are particularly reliant on exports to China; for example, over 30 per cent of least developed countries' shipments in 2014 went to China. For several economies in Asia and the Pacific, including Australia, Laos, Mongolia and the Republic of Korea, China also accounted for over 30 per cent of total merchandise exports. In addition, the currency regime adjustment has implications for countries that compete with China in the global export market. According to the UNCTAD indicator of similarity in merchandise trade structures for 2013, many economies in East and Southeast Asia, such as Malaysia, the Republic of Korea, Taiwan, Thailand and Viet Nam, had a trade structure relatively similar to that of China. China's move also pushed adjustments further downward for several developing countries' currencies with US dollar pegs. Vietnam devalued its currency against the dollar by 1 per cent on August 19 and Kazakhstan abandoned the trading band of its currency on  August 20, causing the Kazakhstani Tenge to drop by over 20 per cent against the US dollar in a single day.

The depreciation of Chinese currency and its further adjustment are also causing concerns to our country's export industries. The government and the Bangladesh Bank should act immediately to offset the damage to be caused to the exporters in a period of negative export growth as suggested by the economists of our country. As we have to compete with China in the global market for our readymade garment (RMG) product, this depreciation would make their product cheaper in global market which would increase the possibility of losing our market share. In 2014, China grabbed 37.5 per cent apparel market of the world followed by Bangladesh with only 4.85 per cent or worth US$ 25.50 billion. The 'Made-in-China' apparel items are the main competitors of apparel products originating from Bangladesh in European and the US markets, industry circles said. It is to be noted that Bangladesh exports RMG product remarkably to the USA and some particular countries of Europe where China is a big competitor and the weakened Yuan will help it to sell its product at cheaper price than us. Some apparel exports that fetched Bangladesh in 2013-14 some $ 241.37 million may face trouble.

 Although some economists said the devaluation of Chinese currency against US dollar will not harm Bangladesh's external trade rather help through cheaper import of raw materials from the giant economy. The concerned authority of the Bangladesh Bank said Bangladesh isn't getting swept by the tide of depreciation because of the strength of its garment export industry, where it is the global leader after China. The devalued Yuan and Indian Rupee help Bangladeshi apparel makers by reducing their cost of buying raw materials such as buttons. In this case, if effective negotiation is done, the depreciated currency would bring a blessing in disguise for the country. The statistical export data of Bangladesh's Export Promotion Bureau in the months of July and August says that our export of August is 5 per cent higher than the month of July. The strategic export target  of July-August 2015-16 specially for knitwear, woven garments, home textiles and manufactured commodities  are 2240.21 million, 2381.92 million, 143.54 million and 5434.44 million US dollars where the export performances are 2258.56 million, 2226.47 million, 103.34 million and 5201.01 million dollars respectively. Although there is a positive prospect in export of August but the exact effect can be seen from the data of the export growth of respective sectors of September.

Economists argue that Bangladesh imports nearly US$ 8.0 billion goods from China, the largest bilateral trading partner of Bangladesh, and most of the imports are raw materials. They calculated that Bangladesh might gain around $350 million a year as most imports from China have become cheaper than before. Again, cheap raw materials procurement helps to raise the competitiveness in global market of Bangladesh-made products. Moreover, it would also drive some financial benefit from imported China-made heavy machinery and other industrial equipment.

Instead of having some financial gains, Chinese economic slowdown will definitely narrow our window of opportunities as global stocks in the USA, Europe and Asia suffered sell-off for this. While Chinese economy is blessed with depreciated Yuan, many developed and developing economies of Asia, Africa and Europe have to move further downward to respond for this.  Our government and the central bank should come forward with policy support and some incentive package to our domestic exporters to guard against the Chinese currency devaluation phenomena as any further Yuan weakening against US dollar will be a real concern not only for our exporters but also for our economy.

This article is a production of Research and Innovation Lab (RIL) at Royal Capital Limited written by Suborna Barua, Assistant Professor at Department of International Business, University of Dhaka and Hasib Ahamed, Research Analyst, Economic Wing at RIL.

Source: The Financial Express, 05 October 2015