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Chinese currency wars: risks for Ukraine


On September 10 the People's Bank of China lowered the reference rate of yuan by 0.22% to 6.3772 yuan per 1 US Dollar. Although the head of the State Council of China Li Keqiang says that the country will maintain a stable yuan rate at a reasonable level, in reality China's support of the currency rate comes at an extremely expensive cost.

This becomes clear after looking at the figures. Only in August China’s gold reserves declined by 2.6%, which is no less than 94 billion dollars. As a result, the National Bank of China refused from direct intervention.

Although the devaluation of yuan by 4% is not something unusual by Ukrainian standards, a currency fluctuation of the world’s second largest economy has a significant impact on the global picture. The currencies of several other developing countries are devaluating, too. For example, Turkish lira devaluated by 8.5% since August. Currencies of CIS countries are becoming cheaper even more actively.

According to Bloomberg, Chinese economists are testing the probability of further currency devaluation to 7 yuan per 1 US Dollar by the end of 2015 and to 8 yuan till the end of 2016.

All of this points to the fact that yuan could lose 20% of value by end of 2016. Such devaluation will give start to “currency wars” all over the world. Ukraine, anyway, will have to meet the challenge of global currency wars. Why? Let’s take Kazakhstan, for instance. In August tenge, the national currency of this country, devaluated by 26% to US Dollar. Over the same period the rate of Ukrainian hryvnia to US dollar remained relatively stable. This means that Ukrainian goods in Kazakhstan became 26% more expensive during the month, and this will inevitably have negative impact on export from Ukraine. In particular, local consumers can simply refuse from Ukrainian products, the price of which has risen sharply, and switch to the cheaper ones. Note that Kazakhstan is our most important sales market in CIS after Russia and Belarus. Last year the volume of Ukrainian exports to Kazakhstan amounted 1.1 billion US dollars.

Yuan devaluation may also negatively impact the Ukrainian metallurgy industry. Chinese steel companies are actively exploring traditional Ukrainian markets in Europe and the Middle East. According to Eurofer, China's share in total imports of rolled products in the EU has reached 30% in the first quarter of 2015. Further yuan devaluation can only help Chinese companies to become stronger in this market, because they can offer their products at cheaper price.

And the last point. Last week Ukraine was shocked by news about the projected rate of UAH 24.1 per 1 US dollar, which was included to the draft project of state budget for 2016. In my opinion, this exchange rate is quite an adequate response to the risks of global currency wars in 2016. Moderate devaluation (without insane jumps that we have witnessed last February) can support Ukrainian exports and increase budget revenues next year.

Andriy Prykhodko, analyst of UniCredit Bank

Date: 15.09.2015


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