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Home » Business » Finance Special

Currency wars create shopping bargains offshore

By Feng Jianmin | February 2, 2015, Monday | Print Edition

Ordinary Chinese may not be versant in the strategies driving the global currency wars, but they do know a bargain when they see one.

In places like Europe, Japan and Russian, plummeting currencies have opened a Pandora’s box for Chinese shoppers, who can buy luxury goods abroad more cheaply than at home.

France, Italy and other Eurozone countries have long been magnets for Chinese tourists seeking brand products along with iconic scenery. Now Chinese fashionistas can buy designer labels in euros for up to half the price they would pay at home, where duties on luxury goods apply.

Compared with just a month ago, shoppers can save 40 yuan (US$6.45) for every 100 euros (US$113) they spend, after the European Central Bank announced a 1.1-trillion-euro “quantitative easing” program. That scheme essentially involves printing money to buy bonds, driving interest rates lower. Adding to euro woes is uncertainty in Greece, where an anti-austerity party won power in last month’s election.

A year ago, the euro was equivalent to about 8.30 yuan. It is now hovering just below 7.10 yuan after touching 6.97 in late January.

The currency wars have been triggered by several factors, including weak growth, fears of deflation and national tactics to keep exports competitive. Weaker currencies make exports cheaper and imports more expensive.

Amid a general climate of benign inflation, countries including Denmark, Swiss, India, Peru, Egypt, Turkey, and Canada announced interest rate cuts after the European Central Bank announced its bond-purchasing plan on January 22. New Zealand has put its rate-rise agenda on hold, and Singapore last Tuesday made a surprise announcement that it was lowering the exchange rate of the Singapore dollar.

In Japan, the yen weakened last October after the Bank of Japan announced an 80-trillion-yen (US$678 billion) monetary easing program.

The Japanese currency fell from around 5.60 yuan per 100 yen to as low as 5.05 yuan.

The weaker yen has been welcome news for Chinese travelers. In a Travelzoo survey last month, Chinese tourists chose Japan as their favorite holiday destination for a second year running.

Even Russia has emerged as a shopping destination of interest after the ruble lost nearly 40 percent of its value amid tumbling oil prices.

Xinhua correspondents in Vladivostok last week reported a flurry of buying activity by Chinese visitors, scooping up brand cosmetics, gold and jewelry ahead of the Chinese New Year this month.

In January, Chinese tourist numbers in the eastern Russian city were 50 percent above a year earlier, the report said.

Amid the swirl of gyrating exchange rates, the US dollar has been on the rise. The dollar index, which measures the value of the greenback against a basket of foreign currencies, is approaching an 11-year high of 95.48. The index has been rising from a reading of 80 last July.

Last October, the US Federal Reserve announced it was ending its five-year-long quantitative easing program amid speculation that it would start to raise interest rate from zero this year if the economy shows signs of a solid recovery.

The negative effects of the dollar’s strength on Chinese tourists may be offset by an attractive US program allowing multi-entry visas valid for up to 10 years for Chinese travelers.

Yuan’s role

So where does China stand in the currency wars?

For the first time since 2005, the yuan last year weakened against the US dollar by 0.36 percent. The currency’s real effective exchange rate, a rate measured against major trading partners, jumped 6.2 percent last year to a record high, according to data from the Bank for International Settlements.

Economists said whatever China decides to do now won’t be done in haste. Authorities are certain to want to maintain a stable financial system as a backdrop for further economic reforms, they said.

Citi Group in its 2015 global outlook said it expects the trend of divergence between the US dollar rate and real effective rate of the yuan to continue this year.

Shen Minggao, chief China economist at Citi, said China would not let the yuan appreciate at the same pace as US dollar because that could hurt Chinese exports to Europe, China’s largest shipping destination.

But the US is expected to continue to put pressure on China to keep the yuan strong to rein in China’s trade surplus, which hit a record in 2014.

Shen said he expects the yuan to float at about 6.30 yuan per US dollar this year, weakening slightly from the current 6.20 level.

The People’s Bank of China signaled that it doesn’t want a much cheaper yuan against the dollar by setting the reference rate at around 6.13 yuan per US dollar in the past 10 days, compared with a market price of around 6.25 yuan.

The market price has been consistently testing the lower end of the trading band, at 2 percent below the reference rate, calling for central bank intervention.

When the limit is reached, the central bank has to either pump more dollars into the market to stabilize the rate or revise down the central parity rate to allow the market larger room for trading.

The central bank last Monday actually adjusted the reference rate for the British pound by 2.1 percent lower — from 9.0444 yuan per pound to 9.2406 yuan — to allow the market to trade one pound for 9.38 yuan.

There has been no revision for trade in the US dollar.

Qu Hongbin, HSBC chief China economist, said China needs to create inflation and boost the economy this year, but letting the local currency depreciate won’t be its first choice.

“The greatest challenge for policymakers this year is deflationary pressure,” said Qu. “China could ease monetary policies, carry out more active fiscal plans, and continue financial and economic reforms to address the issue. Guiding the currency significantly lower is also an option but far less effective than those three.”

Finance Special


 

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