China unexpectedly devalues its currency

With rapidly falling exports and huge ambitions, the Chinese Central Bank devalued its currency, the yuan/renminbi which caused major repercussions in financial markets throughout the world. Most took it as a negative sign of flagging growth throughout the global economy and it pushed oil prices, metals, and other commodities down sharply. The People’s Bank of China on Tuesday pushed the currency’s trading range against the dollar, fixing t at 1.9% and allowing a range around that of 2%, with a foreign exchange sale occurring in the event of a needed correction.

China’s currency has what is called a “shadow peg” meaning that it is not expressly pegged to the dollar, but is managed in such a way that it can be considered a pegged currency, for all intents and purposes.

What does this mean for the frontier markets of Asia? Coupled with likely devaluations in the emerging economies, with Russia’s already come and gone and India’s devaluation likely, it could mean that the value of Central Asian exports have increased. However, consider that most energy and natural gas benchmarks are measured in dollars – meaning that the margin per barrel of oil from a country like Kazakhstan based on the differences between the local central Asian currency and the renminbi shrank, while the value of any export to dollar or euro denominated countries has grown. Whatever the outcome, Central Asian Central Banks will likely be considering additional devaluations themselves.

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News Briefs:

  • The European Bank for Reconstruction and Development (EBRD) announced that it is providing a loan of some 45 million euros to Coca-Cola Beverages Tajikistan CCBT for setting up a soft drink bottling plant, as part of an overall development plan aimed at cutting down on imports and raising domestic industrial output. The scheme is part of Coke’s operating subsidiary incorporated in Turkey, called Coca-Cola Icecek, and will be located in Dushanbe with a capacity of 100 million liters. Additional bottling operations occur in Kazakhstan and Turkmenistan.
  • In concert with the devaluation of the yuan, the Indian rupee also saw its currency go down relative to IMF global benchmarks. The Chinese devaluation has caused a number of free-floating Asian currencies to correct themselves, such as Thailand and South Korea (particularly those that are highly trade dependent). However, it remains to be seen how much these devaluations will help or hinder Central Asia’s balance of trade, as both India and China are major export markets.
  • The Kazakh government is launching a new pension system, promising to bring greater pensions to state employees and is an important step (according to developmental economists) in generating savings that can be transferred into investment – and might promote the growth of a larger financial services industry in Kazakhstan. However today, the bill was only read in front of Parliament, and there was substantial contention as to how the pension system would affect state revenues, with leader of the Ak Zhol party Azat Peruashev saying that state employees would search for new ways to dodge costs associated witht eh 5% obligatory employer contributions introduced by the bill on top of the existing 10% pension contributions, essentially constituting 10% of every person’s official wages. However, this could also be an opportunity for greater corruption and embezzlement as it is easy to pilfer money from pension funds whose security is lackluster.
  • Centerra Gold’s former CEO, Leonard Homeniuk, was detained in Bulgaria on the request of Kyrgyzstan,, apparently. The request for detention comes from claims that the Kyrgy Republic alleges improper transactions with Kyrgyz officials in connection with the Kumtor gold mine project in the 2003-2004 time period – Homeniuk served as CEO of Centerra from 2004 to 2008 and retired from the company afterwards, having no longer been involved in the project.

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