What is Impact of the Renminbi’s Devaluation on Singapore?

By Paul Ho (guest contributor)

China is currently Singapore’s biggest export market, accounting for 14% of our export value. Therefore a devaluation vis-à-vis the Singapore dollar will make Singapore’s goods more expensive to the Chinese.

To put matters into perspective, five years ago, 1 Singapore Dollar (SGD) traded as high as 5.33 Chinese Renminbi (RMB). Now 1SGD trades for 4.48 RMB. The RMB has strengthened a lot against the Singapore dollar.

The rise of the US Dollar

The recent rise of the US Dollar (USD) tracks the United States’gradual emergence from the recession with its unemployment rate dropping to 5.3% (as at July 2015) and an impending rise of Federal Funds Target Rate, making the USD and US assets attractive.

Hence, many currencies are weakening against the USD. Given that the US and Japan have unilaterally devalued their currency via Quantitative Easing (also known as printing money) while China’s RMB has strengthened for years against the major currencies, a slight devaluation of the RMB is understandable. The fact that China tolerated years of higher currency value attests to its new determination to be seen as a responsible world partner in global economics.

With its current devaluation, it is still a long way from its lowest point. China’s RMB has been spot trading at the lower limit of the 2% band, hence the ~2% devaluation is in line with market forces. However what is unknown is how the market will react when the last day’s prices will become the midpoint of the band for the next day for the mid to longer term.

Capital flight from China?

There should not be too much worry of capital flight from China. China’s massive foreign reserves amounting to ~US$3 trillion is more than sufficient to support the currency and the Chinese central bank can easily sell USD treasury bonds for RMB.

The RMB has risen from June 2010 to May 2013 by over 15% against a trade weighted basket of some 61 currencies, according to data from the Bank of International Settlements. Hence, this devaluation should be seen in the correct perspective. When market forces recover, it could well appreciate.

Chart 1: Bank of International Settlements

Impact of the RMB devaluation on Singapore

As Singapore is an advanced economy, exports to China may be intermediate or advanced value-added-products which may not be as price sensitive and hence it should be able to withstand some price increase.

If Chinese nationals think that the devaluation of the RMB is a trend, we may yet see some exodus of funds from the wealthyChinese to the rest of the world. Tom Orik, Chief Economist at Bloomberg, estimated that a 1% drop in currency value leads to an exodus of about $40 billion of funds, with a three month lag. We may see a fraction of this $40 billion come onto Singapore’s shores.

Chart 2: CNY per 1 SGD, XE

The RMB (or Yuan) has gradually devalued against the Singapore dollars. But in the last few years the Yuan has been even stronger against the Singapore dollar.

Will China’s currency weakening cause SIBOR to rise?

Singapore manages its exchange rate against a trade-weighted basket of major currencies. As China is Singapore’s major trading partner, it is almost certain that China’s RMB is one of the component currencies that Singapore manages against.

If China’s currency weakens, it could also drag the Singapore Dollar lower against the US Dollar as Singapore needs to carefully manage its currency vis-à-vis a basket of currencies.

When the Singapore Dollar drops against the US Dollar, there is a chance that Sibor interest rates will have to rise to keep pace with the exodus of funds.

Impact on exports and Singapore companies

I foresee that a 2% devaluation of the RMB will not significantly affect Singapore’s exporters as Singapore is an advanced economy which exports intermediate goods and valued added products, hence these products should be able to withstand a 2% impact.

In the best case scenario, exports to China may even rise in value due to RMB devaluation as many of the factories or imports may be already contracted and committed beforehand and probably denominated in USD.

In the worst case, exports may fall if exporters are unwilling to adjust prices to absorb the increase in prices. However do note that a 2% devaluation against the USD is not necessarily a 2% devaluation against the SGD as the SGD is also devaluing against the USD.

Shares of Singapore exporters which have a big component of China sales will be impacted. China’s stock markets may see impact from the exodus of funds, but it is hard to estimate the effect now.

What is the impact on the property market?

I doubt the devaluation would impact Singapore’s real estate market in a big way, unless China’s wealthy start to move their funds to Singapore by purchasing commercial or industrial properties.

Positive development from China’s removal of a pegged mid-point

China’s central bank generally sets a daily midpoint for the yuan, around which the currency can move up and down within 2%. But on Tuesday 11 Aug 2015, the People’s Bank of China surprised markets by announcing that going forward, the midpoint will be based on the previous day’s closing price.

This moves China towards greater exchange rate flexibility and a more freely traded currency. With this move, China moves one step closer towards having the RMB included into the IMF’s basket of special drawing rights currencies, an elite group of currencies used to value reserve assets. One day, the RMB may become the world’s top reserve currency.

While China still can intervene in the currency market, the exchange rate is now more freely traded as the mid-point price is determined by the previous day’s closing price. Market forces will dictate how much the currency will trade. China’s central banks can intervene when the need arises.

By Paul Ho, holder of an MBA from a reputable university and editor of www.iCompareLoan.com, Singapore’s first Cloud-based Home Loan reporting platform used by Property agents, financial advisors as well as Mortgage brokers. Posted courtesy of www.Propwise.sg, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions. Click here to get your free Property Beginner’s and Buyer’s Guide.

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