Yuan news 'great for SA'

By: Helmo Preuss

Johannesburg - The move on Thursday by the People's Bank of China (PBC) to remove the decade-old US dollar-yuan peg is great news for South Africa, as it will encourage even more South African exports of raw materials to China, without necessarily leading to a stronger rand, analysts said.
The main proviso is that South Africa gets its logistics chain management up to the standards of its competitors; otherwise all the extra demand engendered by the yuan revaluation will go to countries such as Australia and Brazil.

That is one of the reasons why Maria Ramos was appointed chief executive officer of transport utility Transnet, as Transnet is the key player in the logistics chain.

Railway derailments, stacker malfunctions, lack of rolling stock, the unavailability of cranes for the port of Ngqura, these are all completely unacceptable and as bad as dropped passes in a Tri-Nations match.

The halftime score line was not very impressive, as bulk export volumes declined by 2.9% year-on-year (y/y) in June to only 9.194 million tons after a respectable performance of 10.24 million tons shipped in May.

Who dropped the pass?

Chinese imports on the other hand grew by 15.1% y/y in June, which is a performance that South African exporters should at least have matched.

Rio Tinto for instance boosted its second quarter iron ore output from its Australian mines by 15% y/y to over 32 million tons, whereas Kumba will be lucky to export that much in a full year.

Apart from boosting demand for South African exports, the Chinese revaluation will also help in "burden-sharing" of the adjustment to global imbalances.

Over the past three years, the burden of currency adjustment to the US dollar has been carried by Europe and the so-called "commodity currencies", which includes South Africa.

During this time, the US trade-weighted dollar has depreciated by some 10% with no effect on the burgeoning US foreign trade deficit, which already exceeds 6% of gross domestic product.

The "free-floating" currencies have appreciated by some 30% against the US dollar, but the Asian and Middle Eastern currencies, which account for around two-thirds of the US foreign trade deficit, have kept to their pegs, accumulating massive foreign exchange reserves and intervening to keep their currencies "weak".

In China's case, their foreign exchange reserves are the world's second largest at over US$710bn, while Japan, which has the world's largest, is equally under pressure to allow its currency to find its own value without Bank of Japan purchases of US dollars.

In the fourth quarter 2004, the rand went to its strongest level real trade-weighted value this century, as real exports grew by 9.3% y/y.

This is in marked contrast to the fourth quarter 2001, when real exports plummeted by 8.0% y/y, the weakest y/y change in exports this century, resulting in a record weak rand.

Now that Asian - Middle Eastern currencies such as the Saudi Arabian riyal are unlikely to abandon their decades-old peg to the US dollar - currencies will share some of the burden of global currency re-alignment, it means that although South African real export growth could exceed last year's performance, the rand need not appreciate as much.