Devaluation of yuan should have little effect in Australia

OPINION: I had several people last week ask me to explain what the recent devaluation of the yuan means for us in Australia.

The thing about the yuan, which the Chinese prefer to call the renminbi, meaning something like 'the people's currency', is that it does not float freely against other currencies like the Australian dollar does.

Each morning, the People's Bank (like our Reserve Bank) pegs the yuan to the American dollar within a 2% tolerance or range.

As the US unit has strengthened, the effect has been that the yuan has also risen.

This has obviously impacted on the attractiveness of Chinese exports.

In fact, the latest figures show exports have fallen 8.3% year over year to last month.

Of particular concern apparently is the relative tanking of the Japanese yen, restoring Japan as a manufacturer of 'cheap' exports.

Not only that, but one of China's major problems is that capital has been flowing out of the country because of the artificially bolstered value of the yuan over other currencies. Like the Australian dollar, for example.

And as you've no doubt read, that capital is an Exocet missile targeting Australian property, farms and businesses.

Now, in theory, the escape of capital from a country would be putting downward pressure on the currency, but as the yuan is a pegged currency, this hasn't happened.

Ironically, the People's Bank has recently sold off $US231 billion from its reserves in an effort to give credence to its artificially propped-up yuan.

The bottom line is that under pressure from a projected GDP growth of somewhere between 4.4 and 6% next year (down from 9.4%) and a badly faltering stock market, the People's Bank changed its tune and devalued the currency by 3.5% over three days recently and there's every likelihood there's more to come.

The effect on Australia will be minimal.

The yuan is still overvalued relative to our dollar, our property market remains attractive to cashed-up Chinese trying to get their dough out of China into 'safe' havens, Australia's export contracts with China are written in US dollars and the devaluing of the yuan will help make Chinese imports relatively cheaper even against the fall in our unit that followed the devaluation a couple of weeks ago.