Go to contents

Won-yuan rate grows more favorable amid China`s decline

Posted November. 05, 2012 04:22,   


Korean residents of China and Korean students there often say that the won-yuan exchange rate has grown more favorable to them. The rate, which remained quite high for several years, has recently declined by 175 to 176 won (16 U.S. cents) per yuan.

Around seven years ago, the exchange rate moved stably within a band of 110 (10 cents) to 120 won (11 cents) per yuan as inflation in China remained low. But the U.S.-led global financial crisis of late 2008 instantly sent the rate to a range of 230 (21 cents) to 240 won (22 cents) against the yuan. Fortunately, the exchange rate declined as the crisis subsided, but hit 185 (17 cents) to 195 won (18 cents) until as recently as last year.

The Chinese government has also poured massive liquidity in the economy to help overcome the crisis, causing real estate prices and inflation to soar. Korean residents and students in China back then both had a hard time making ends meet. Many Korean students in China said that they did not want to burden their parents. More than a few students were forced to return to Korea, with one saying, “Studying in Korea would be better.”

Recently, however, the value of the Chinese currency has significantly declined due to the slowing performance of the Chinese economy. Reservations days in advance used to be required to eat at popular restaurants in Shanghai, but finding seats at those places has grown easier. Business at department stores and shopping malls has also slowed.

Many news reports suggest unemployment has gone up while tax revenue is falling. Beijing has pledged to use domestic consumption as one of its economic growth engines, but demand is not rebounding as fast as hoped. Chinese consumers seem to have sealed their wallets to avoid spending.

The trends in China`s real economy as evidenced by economic indicators remain low as well. The purchasing managers’ index for the manufacturing sector, which best reflects the real economy in China, is staggering below the benchmark score of 50.

Indicators for power consumption, railroad freight volume and new loans look gloomy as well. Electricity consumption in September edged up just 2.9 percent year-on-year, the lowest increase in 40 months. Railroad freight volume tumbled 7.97 percent year-on-year, and turned to negative growth for the first time since 2009. New yuan-denominated loans extended in September amounted to 623.2 billion yuan (10 billion dollars), or way below market estimates.

The Chinese government seems to be handling the eurozone fiscal crisis quite differently from what it did in the wake of the global economic crisis four years ago. No drastic fiscal policy has been taken, with Beijing merely using monetary policy through two adjustments in the reserve ratio and two interest rate cuts this time. China is a country extremely wary of inflation, and its government is reluctant to ease fiscal policy due to fears over rising prices ahead of the upcoming change in its leadership.

The yuan`s devaluation is also a sign of a weakening Chinese economy. As such, what is good for Korean residents and students in China could mean bad news for Korea, whose economy is closely interlinked with that of China and could struggle if the latter falters.

Canada was able to join the league of advanced economies thanks to the U.S. Korea has had more chances for growth due to the emergence of China, and could develop into a small but strong country if it can leverage economic relations with the Middle Kingdom.

The Chinese economy does have measures at its disposal to use. Several positive economic indicators have also been announced. Economic experts say monetary policy moves, including cuts in reserve ratios and interest rates made by the central Bank of China in the first half of the year, has gradually started to generate effects, predicting a rebound in the fourth quarter at the earliest.