The Euro’s rapid 15% decline against the Euro has had an important side effect against the Yuan which is pegged to the dollar.While currencies around the world are depreciating against the dollar due to “safe haven” trade,the yuan remains immune,due to its peg to the dollar.Europe is China’s biggest export market throwing a number of its companies in peril due to the Greek Contagion . A 15% movement in currency makes it very difficult for a company to adjust particularly if it is running on paper thin margins.A Chinese company with 10% margins which exports solely to Europe has the potential to go bankrupt if the situation sustains for a long time.
I think it might not be inconceivable for the yuan to devalue against the dollar for the Chinese to save their massive employment generating export industries. Note unlike a lot of the US companies , most of the Chinese exports are commodities which have much lower margins. Another direct effect has been that it makes the Europeans industries more competitive . However I think the weakness in Euro is not a singular event rather it will be followed by more seismic changes in currency.Managing currency risk is becoming more important for export industries than managing their operations these days.
The pain of the European debt crisis is spreading, with the plummeting euro making Chinese companies less competitive in Europe, their largest market, and complicating any move to break the Chinese currency’s peg to the dollar.
Chinese policy makers reached a consensus last month about breaking the dollar peg. But allowing the renminbi, which is also known as the yuan, to rise against the dollar now would mean a further increase in the renminbi’s level against the euro, creating even more problems for Chinese exporters to Europe.
The euro has plunged against the renminbi in recent weeks, at one point Monday reaching its lowest level since late 2002.
The steep rise of the renminbi prompted a Commerce Ministry official in Beijing to warn Monday that China’s exports could be threatened. The official’s comments, the most explicit yet on the implications for China of Europe’s recent financial difficulties, suggest that even the world’s fastest-growing major economy, and increasingly the engine of global growth, is not immune to the crisis that started in Greece and threatens to spread across much of Europe.
“The yuan has risen about 14.5 percent against the euro during the past four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries,” Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services.