Australian Companies Are Watching Chinese Yuan Weakness Closely - Here's Why

There is a lot of fear in markets at the moment about the impact of the Chinese yuan’s weakness over the past six weeks against the USD.

The primary fear is that as a one-way bet for most of the past three years against the US dollar, the recent move in USDCNY from 6.05 to 6.23 this morning is going to unleash a wave of defaults or margin calls on financial structures that were based on a steady appreciation of the yuan.

That means the yuan is likely to weaken further and it increases the risk of acute financial market trouble.

But while the USDCNY rate continues to weaken, the news for Australian business is that that after depreciating around 20% between April 2013 and February 2014, AUDCNY has appreciated 7.2% since February this year.

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There is some good and bad news in that.

China was both Australia’s primary export and import destination, according to the Department of Foreign Affairs and Trade in 2012-2013.

Iron ore dominates Australia’s exports to China by a long way but it and other mineral exports are largely denominated in US dollars. So our miners will be concerned that the rise in the USDCNY rate might choke off a little demand as their product gets pricier.

But while the yuan weakness is clearly a target of the Chinese leadership in stemming speculative activity in the yuan as part of their reform efforts, the reality is that Chinese development has continued unabated. This means the volumes will still flow.

But China also buys a large amount of agricultural exports and an increasing amount of manufactured exports. Aussie farmers and manufacturers won’t want the AUDCNY to appreciate too much further and erode their competitive position.

On the import side of the ledger, Australian business will be cheering as telecom equipment, clothing, computers and furniture (our top four imports) will all now be cheaper this month for the first time in a year.

In the end though, the key for Australia and the Australian economy is that as long as the Chinese authorities are targeting speculative activity with a view to making the Chinese economy more stable, in the long run Australia will remain a net winner from our relationship with China.

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