China’s central bank made a historic move on June 16 by deciding to allow for more exchange rate flexibility for its national currency, the renminbi. It had been pegged at a rate of 6.83 to the dollar since mid-2008.
Following the Chinese central bank’s decision, the renminbi has strengthened to 6.80 against the dollar, with more appreciation ahead over the next couple of years due to existing economic fundamentals if the authorities allow the currency full flexibility on the foreign-exchange market.
The move toward greater exchange-rate flexibility marks a turn by the Chinese authorities away from industrialization and toward domestic consumption.
On the whole the move may be positive for Ukraine’s economy, as China continues to grow as an important and more powerful consumer of Ukrainian goods, from food to machinery. However, it could leave Ukraine’s steel sector with slim growth prospects as the pace of industrialization in emerging economies is likely to slow.
Internationally, the move provides assurance that policymaking on steering the global economy out of the deep recession will be coordinated by major current economic powers, including China.
The Chinese exchange rate has been a source of tension between China and the United States, which accuses Beijing of creating prolonged imbalances in international flows of trade and capital. The U.S. views the renminbi as artificially undervalued, giving China huge trade advantages and large surpluses.
Further escalation of trade disputes or trade wars now appears to have been averted, perhaps timed for the recent G-20 meeting in Canada. The tone of that meeting was consequently quite conciliatory, although the exchange rate topic remained high on the agenda.
This is good news for Ukraine because its economy is considerably dependent on exports and, thus, sensitive to any abrupt and disorderly developments on the international commodity or capital markets.
The move also marks a shift by the Chinese authorities in the medium term towards a more domestic-oriented economy that does not rely solely on external demand from the U.S. and the European Union. The question mark remains, however, over whether Chinese authorities are capable of mastering an orderly cooling of the domestic economy and reorienting it towards greater internal consumption and less industrialization.
The risk for Ukraine is if this shift turns out to be unsuccessful and hurts the country’s major sector of steel, then it would have a negative impact on steel prices and hence on Ukraine’s economy, which still relies heavily on steel exports for foreign-currency inflows.
When China brings to an end the massive stimulus package that has helped drive its continued economic surge, the domestic steel market is likely to cool down somewhat. But our scenario is that it will not have a disruptive impact on Ukrainian trade overall.
Ukraine is in a strong position to benefit from the new cycle in the global economy that is starting to materialize, where emerging market consumers, led by China, are gaining more purchasing power over certain items, primarily food.
Therefore, we think that during this new economic cycle, Ukraine’s economy will make adjustments, with its steel sector stagnant and agriculture and machinery more buoyant in the medium term.
Consumption in Asian emerging economies will lead to additional demand for food and locally produced goods and services. For instance, energy consumption is likely to increase; hence demand for low-cost machinery by the energy sector will be met by Ukrainian producers as well.
This could boost specialized capital goods producers in Ukraine, such as energy equipment manufacturer Turboatom and Zaporizhtransformator, which makes power transformers, as well as the crucial agriculture sector.
The demand for agricultural products will likely offset the moderately negative effect of the Chinese foreign currency policy move on the steel price. This will allow the hryvnia to appreciate to Hr 7.8 to the dollar at the end of the year.
The shifting pattern in the Chinese economy and its effect on Ukraine will also cause a shift in the employment market. Students and people seeking professional retraining should look at the agricultural and specialized machinery sectors, as professions associated with these are set to grow in demand in the coming years.
Alexander Valchyshen is head of research at Investment Capital Ukraine, a Kyiv-based investment bank. He can be reached at [email protected].
