beyondbrics

Plenty has already been written about what the appreciation of the renminbi will mean for the Chinese economy. But what about China’s neighbours?

Johanna Chua at Citi has been looking at this very question, and come to some interesting conclusions – based on the medium-term real appreciation of the currency, rather than the immediate nominal gain.

Probably the most obvious thing to look at is how the competitiveness of Chinese exports might benefit rivals. Chua looked at which regional economies had to closest comparison in export make-up to China to see which countries were best placed to exploit more expensive Chinese goods – and found Malaysia, South Korea and Taiwan to fit the bill. But…

When we decompose by commodities, we find that increased export similarity is largely due to “machinery and transport equipment” item, where “electronics & electrical Equipment” (E&E) is the dominant component for most of Asia. Within this, there are significant intra- Asia trade production linkages, and therefore, the net impact of trade to these countries from a RMB appreciation will be less to the extent that their E&E exports are complementary to China’s as part of a production chain.

However…

We think the case of trade similarity may be stronger for India, Pakistan and Thailand, where their overlap with China is across a broader category of goods (food, other manufactured items like textile, clothing, footwear).

And there’s good news for some of the less developed countries in the region – the stronger renminbi gives China more clout when buying abroad. In addition to taking up a bigger share of the Singapore and Hong Kong property markets (Chinese mainlanders bought 18% of luxury homes in HK last year), China will use its excess capital to invest in countries better equipped (demographically speaking) to reallocate production/surplus labour to manufacturing:

Thus, China’s longer-term RMB REER appreciation could prompt surplus capital in China (and other surplus countries) to be deployed to investing in infrastructure and manufacturing capacity in other parts of Asia. This should be especially welcome for capital deficient countries like Vietnam, India, Pakistan, Sri Lanka and Indonesia.

Chua doesn’t see the RMB appreciation as a significant driver of inflation in China, and certainly not when compared to the affect of widespread wage inflation. Nor should it deter capital inflows. But it should help cool China’s rampant economy, and share the fruits of the boom in the process.

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