China’s surprise devaluation of its currency on Tuesday, Aug. 11 continued the following day, with the yuan settling at RMB 6.45 to the U.S. dollar, down approximately 4 percent from the start of the week and hitting a four-year low against the U.S. dollar. Although lack of access for U.S. beef and restricted access for U.S. pork mean that the impact of the devaluation on U.S. exports to China will be limited, the issue could have much broader implications for our competitive position in other markets.
The U.S. dollar was already at multi-year highs against the currencies of many of our major import markets and competitors, and that disadvantage worsened this week. The yuan’s downward slide slowed on Thursday, closing at 6.4 to the U.S. dollar (down 3 percent from the start of the week), as the People’s Bank of China commented that the currency will stabilize and rise eventually. Other currencies also stabilized to some degree, but the U.S. dollar still gained another 1 percent to 2.5 percent against most currencies, even after retreating somewhat by the end of the week. The latest trends are shown in the following table:
|Currency/USD||YOY % Change||Thurs/Mon % Change||Year High|
NOTE: The year-over-year change is shown in the first column, the change for Aug. 13 compared to Aug. 10 is in the second column, and the last column shows the specific multi-year highs for the U.S. dollar against the respective currencies.
Devaluation of the yuan comes on the heels of several poor economic indicators in China, including a sharper-than-expected 8.3 percent contraction in the value of China’s July exports. Imports dropped by a similar amount, although the decline mainly reflected lower values of both imported and exported commodities. For the first half of 2015, the value of red meat, offal and poultry imports entering China/Hong Kong was $5.675 billion, down 3.4 percent year-over-year. South China traders told USMEF this week that the yuan’s devaluation could erode their already razor-thin profits on price sensitive European pork imports currently on the water, although some have made currency hedges or have pricing arrangements denominated in yuan. Additionally, China’s hog prices are about 2.3 times the European average – a record spread – which is fueling further import growth. China’s wholesale prices for major EU pork items have been below year-ago levels this summer, although there have been recent reports of increasing prices, partly due to the fact that the European suppliers have the dominant share of China’s imports. EU hog prices, in U.S. dollars, are 28 percent lower than last year.
Reflecting the strong U.S. dollar – and part of the reason China devalued its currency – the yuan remains 15 percent stronger versus the euro and 22 percent stronger versus the Australian dollar compared to this time last year. For China, this has translated into more affordable imports from its largest pork and beef suppliers, but the strong yuan has hampered its exports. Chinese meat importers continue to struggle with the added uncertainty of the yuan’s devaluation, as they are not accustomed to yuan fluctuations and thus their margins have already taken a hit.
Neighboring economies that rely heavily on China for economic growth are now facing a further disadvantage, in addition to China’s slowing economy, as a weaker yuan will weigh on China’s imports. Taiwan and Vietnam each took action to help devalue their currencies this week. Meanwhile South Korea’s economy posted its weakest growth in six years in the second quarter. Dependence on exports, many of which go to Japan and China, account for about half of Korea’s growth and this means Korea has been hit hard by the Japanese yen’s weakness plus the economic slowdown in China, and now the weaker yuan. Overall, the uncertainty and concern about China’s economy continue to keep markets on edge.