What Beijing’s currency move means for Irish businesses

The People’s Bank of China devalued its currency the yuan with immediate effect yesterday and the impact on Ireland’s exporters is likely to be multifaceted.

The Chinese central bank cut its daily reference rate by 1.9%, which triggered global currency shifts particularly against the euro and the dollar.

The move was inevitable as China’s economy continued to be buffeted by faltering export growth and falling internal consumption.

The announcement indicates that the pegging of the yuan with the dollar has now reached an unsustainable position.

As the dollar grew in strength over the past year the yuan value was pushed up.

Since January, the yuan has risen in value against the euro by 11% (by 31% since 2009), making Chinese exports more and more expensive. Irish firms exporting goods to China was a €2.1bn market last year and will likely be most affected.

Irish-based exporters of services such as computer software, financial services, and aircraft leasing was worth €2.6bn in sales to China last year, and are likely to be the least affected.

The vast majority of our trade with China is in dollars, and hence the yuan devaluation, if it remains at the new central bank reference rate, will be manageable.

There could even be some net gain to Ireland’s manufacturing sector, which relies heavily on a wide range of intermediary electronic and engineering components to complete the final products they export.

Such firms will now pay less for their imports from China. The scale of this trade is significant, with over €2bn of these goods imported from China last year.

Ireland’s pharmaceutical and medical devices exporters are the biggest traders with China, accounting for €750m of exports last year. They are unlikely to be impacted by the devaluation.

However, the food and drink exporters who make up the second largest exporting sector to China — over €500m last year — will inevitably have to absorb the currency loss.

Glanbia, Kerry Group, Abbott Nutritionals in Cootehill, Co Cavan, and Nestle in Askeaton, Co Limerick, are all strong dairy ingredients and infant formula exporters to China.

However, pork exporters, particularly Rosderra in Edenderry, have also had a strong market presence in China.

The most worrying issue for many Irish exporters will be the prospect of further devaluation, or a free float of the yuan, now that the policy pegging with the dollar has been replaced by a new currency regime.

The scale of the lost competitiveness by Chinese exporters over the past year because of the strengthening of the yuan, and the economic upheaval in China, would indicate that more devaluations can be expected.

John Whelan is a leading international trade consultant