As of today, the yuan has fallen by close to 5% with some reports that the target is 10%. Technically, China is letting market forces determine the yuan’s price and not peg it to the dollar. And the market is extremely nervous about the state of China’s economy and thus the decline. The repercussions are being felt around the globe with lots of consternation. While there are a number of obvious impacts – goods becoming cheaper at the local Walmart while U.S. wages and jobs decline (a connection the average consumer does not acknowledge), a boon to China’s exports (in an economy totally dependent on exports) etc. etc., there are some major implications beyond the obvious ones.
By now, I’m assuming that your company has looked at its overall Strategic Risk Management document (what – you say you don’t have one??) and started executing all the strategies related to currency manipulation by China – a major trading partner. Treasury is busy assessing their currency hedging strategies, Supply Chain is busy understanding the impact on their current contracts but hopefully also looking at the impact of higher volumes(because of lower prices) straining their China supply base. They are also looking at total exposure in China and perhaps doing some load balancing geographically. Your Sales group is evaluating all their current contracts and trying to determine how to protect not just margins but market share. And so on and so on. At least, you hope some of this is going on.
One of the bigger implications is the active intervention by the Chinese government, especially since it just tried to stem the sharp drop in the stock market by extremely active engagement. These types of interventions are viewed skeptically, especially by a government that just got done declaring a 7% growth rate eliciting laughter. Economies also thrive because of the currency of trust and once that is eroded, it is hard to recover quickly. Some point to Greece and its crisis with the EU as an example.
A humming economy has been part of the compact (contract) between the government and the people. Political discord always gave way to a growing middle class and its voracious appetite. Unbreathable air, food safety, industrial safety, etc. were not issues that surfaced because the economic engine was humming. There is growing fear that if the economy continues to sputter, political and social discord may not be far behind. The political impact across the globe is not insignificant either. Leading candidates in the US are already lambasting the Chinese and screaming for retaliatory measures. Other regional economies in Asia will feel the political heat to execute counter measures.
The contagion impact is another that we should be concerned about. Moves like this can start the dreaded currency wars where everyone is trying to manipulate the currency markets. China intervened heavily over the last 3 days to prop up the yuan because it was falling too much! The Federal Reserve is probably going to hold off finally increasing the interest rate after 7 years because this lower price will lead to lower inflation. The EU, through active intervention, manipulated the euro down by 20% against the dollar (and the yuan was pegged to the dollar) over the last year. They will be busy planning their counter moves over this weekend. These types of moves are short sighted at best and add significant uncertainty – a death knell for efficient markets.
Times like this are a boon time for those organizations who actively monitor, measure and manage risk. They look at Risk Management not as an onerous, non value added, bureaucratic, form filling requirement but as a core competitive differentiator. They nimbly evaluate the opportunities that present themselves during times like this and quickly move to exploit them. They build sustainable advantages that maximize their customer’s Value Drivers and grab market share. Are you part of such an organization? If not, do you think you need to be? If you are intrigued, I would be happy to send you more material on this topic.