China devalued its currency Tuesday, driving it to its biggest one-day drop in more than twenty years. The move took global currency markets by surprise. But what does it mean for the rest of the region? HPR’s Bill Dorman has more in today’s Asia Minute.
A weaker currency makes a country’s exports cheaper while boosting the price of imports.
That’s the way the economics work. The politics are more complicated. Especially when it comes to China.
Critics have long charged the Beijing government with keeping exchange rates artificially low to keep exports compared to global competitors.
In recent years, China has allowed a slow appreciation of its currency linking it to the dollar. With an eventual goal of having it be a reserve currency recognized by the International Monetary Fund.
China’s slowing economy helped trigger this devaluation, which government officials call a “one off,” to put the currency’s value more in line with market rates.
The move could potentially hurt economies which are heavy exporters to China, a growing number across the Asia Pacific.
For example, more than 35% of Australia’s exports now go to China. Along with about a third of South Korea’s and more than a quarter of Taiwan’s. For New Zealand, Japan and Malaysia, around 20% of all exports go to China. So any change in currency value carries a direct impact on trade.
Market analysts say regional currencies in Asia are also vulnerable. Especially those of Singapore, Malaysia and Indonesia.