REPUBLIKA.CO.ID, By: Toni Ervianto *)
The renminbi's fall to a five-year low against the US dollar has triggered a currency exchange boom on the Chinese mainland, forcing the regulator to strengthen intervention to ease capital outflow pressure. According to the State Administration of Foreign Exchange, the country's top foreign exchange regulator, mainlanders can each exchange renminbi for a maximum amount of $50,000 annually, or the equivalent in other foreign currencies. The renminbi traded on the Shanghai-based China Foreign Exchange Trade System has fallen by more than 1.5 percent against the dollar in the past week. This is the largest weekly decline since August 11 last year when the People's Bank of China, the central bank, announced a foreign exchange rate reform.
China tried to ease fears of more big declines for the yuan as companies from global automakers to Chinese clothing exporters faced a new era of uncertain exchange rates. A deputy governor of the Chinese central bank, Zhang Xiaohui, said there was "no basis for persistent and substantial devaluation." Speaking in a press conference on Thursday, Zhang said the yuan was close to "market levels" after two days of sharp declines. The continued depreciation of the yuan has prompted several Chinese companies to take active measures to cut their dollar-denominated debt.
An increasing number of people have been asking banks to change the Chinese currency into dollars, Guangzhou Daily reported on Monday. Since last week, they have also been buying more foreign currency-denominated financial products, with most using up their annual currency exchange quota.
Though the PBOC's China Foreign Exchange Trade System reiterated on Thursday that there was no basis for the yuan's continuous depreciation and that it was stable against a basket of currencies in 2015, the swings have left the markets perplexed. With more currency deprecation expected in the next few months, companies that have piled up dollar debt in the past are looking to reduce their debt burdens at a time when the economy is slowing sharply.
Despite the rupiah exchange rate undergoing a volatile movement following China’s intervention on the yuan, no immediate threats are on the horizon after the rate fixing. In Indonesia, the rupiah inched closer to 14,000 per US dollar as soon as trading began on Thursday. The last time the rupiah surpassed the 14,000 benchmark was in August, when China made a sudden devaluation of the yuan. The rupiah depreciation persisted until early October, with Indonesia and other emerging economies suffering one of their most volatile routs. There was little chance that the latest yuan depreciation would send the rupiah tumbling as low as it had in August.
The domestic improvements could offset external risks to the rupiah, citing low inflation expectations, higher economic growth and speedier government funding for key infrastructure projects.
As has been widely reported, the economy is expected to bounce to more than 5 percent this year after slow growth of only 4.7 percent in 2015. Inflation is also estimated to remain low as prices stabilize and disbursements of the state budget are expected to pick up speed since the new administration finished consolidating last year. The August and January situations were different. The rupiah had been trading at a fair level following global market developments. Bank Indonesia has been great at letting our currency have some flexibility to adjust to the market.
Bank Indonesia (BI) Governor Agus Martowardojo said on Thursday that the yuan devaluation would continue as the currency was not competitive compared to the Korean won and other currencies in the region. He said the Chinese government’s policy of devaluing the yuan was part of its efforts to improve the country’s exports so that they would be more competitive. The devaluation was also triggered by China’s foreign exchange reserves, which had continued to decline. The yuan devaluation had caused the rupiah to suffer quite a sharp fall, almost touching the level of Rp 13,800 per US dollar on Wednesday, and such depreciation was an overshoot, said Agus. The central bank governor asserted that BI had been and would continue to stay in the market to carry out rupiah stabilization efforts.
China's revaluation of the yuan is a mere flash in the pan for the rupiah, with the local currency unlikely to gain any further footing against the U.S. dollar. The rupiah had already passed its "fleeting moment of positive sentiment" from the yuan revaluation and was expected to fall back to its "chronic problem" of the enormous domestic demand for the greenback overwhelming its short supply. The rupiah's recent gain against the dollar following the yuan's revaluation was a short-term phenomenon that only lasted for the early hours of trading. The effects of the yuan revaluation on the rupiah were likely be short-term because Indonesia was not a major trading partner of China.
Other long-term effects were likely to come from the yuan revaluation, such as a slowing down of China's economy, which would affect global oil prices, other economies and currency bourses, including Indonesia's. Standard Chartered economist Fauzi Ichsan said the impact of the yuan's strengthening was little if not "neutral" on the rupiah. The yuan revaluation was unlikely to create a greater competitive edge for Indonesian exports, as the rupiah's already low exchange rate should have contributed more to boost exports.
IS A CURRENCY WAR ?
A currency war as known as a competitive devaluation is a condition which is international business from countries to competing with another country aims to get the lower exchange rate for their currencies. An effect from currency war is to downgrade exchange rate from another currencies and the real export cost from those countries. The positive effect is a domestic industries, job and boosting a demand from foreign and domestic market. Yet, the increasing of an import cost could make down public purchasing power because an import is getting more expensive. This policy could be triggered counter action from another country which in the end could be triggered general decreasing on international trade. Furthermore, a currency war is also detrimental to all countries.
Therefore, the Indonesia government especially BI governor must alert that the depreciation or the devaluation of yuan as a vigilance for us because those policy could be represented as a currency war.
Many problems related with the depreciation of yuan as a currency war because the policy is the long-anticipated yet still surprising announcement immediately lifted other currencies in the region, particularly the Japanese yen, the Korean won and the Taiwanese dollar. Another reason that the depreciation of yuan as a currency war is the continued depreciation of the yuan has prompted several Chinese companies to take active measures to cut their dollar-denominated debt. Therefore the vigilance on yuan depreciation is a must.
The writer earned his master from the University of Indonesia (UI)
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