Return to search

Yuan devaluation could significantly impact infra

Pinsent Masons says on one hand, yuan devaluation might make the Chinese market attractive to foreign investors, but on the other, make Chinese capital flee out of the country.

On August 11, China's central bank, the People's Bank of China (PBOC), made a move that jolted the global markets, allowing the onshore fixing to drop by 1.9 percent and triggering the yuan's biggest one-day drop in 20 years. 

Announced by PBOC as a free-market reform, the action loosened the yuan's link to the value of US dollar, and allowed more market-based determination to form a new currency regime. 

Helena Chen, partner at London-headquartered law firm Pinsent Masons, said: “To compare with the more persistent and significant yuan appreciation since 2004, this depreciation is still relatively small, and the quantitative impact of the exchange rate move is not likely to be big either, unless it is the beginning of a larger and more persistent period of depreciation.

The CNY/USD exchange rate was set at around 0.121 in 2004. It has been on an upward track for a decade and reached its record high at 0.1655 in January 2014. Today, it is at 0.1568, which is a 30 percent appreciation against the US dollar since 2004.

On the infrastructure space, Chen continued: “Infrastructure could be one of the areas most affected by the devaluation. Foreign investors bringing capital into mainland China to invest in projects will find that their dollars go further, and if the depreciation continues, this will be amplified.”

“Equally, outbound investment will become more expensive, but we may also see capital fleeing the country more quickly, as investors relocate to where the currency is more stable in order to preserve the value of their assets,” noted Chen. “If the market expects further depreciation, this may speed up Chinese overseas investment, especially from the private sectors, to foreign countries.”

In the contractor space, Chen said that there is little reason for concern at the moment.

“So far contractors will not be too concerned about the currency fluctuations, especially if they are state-owned enterprises, since their overseas investment will be aligned with government policy. If they had been taking action that will cause further depreciation, such as purchasing foreign currency, they are likely to discontinue this,” Chen pointed out. 

She believed the depreciation so far would have a limited effect on China's growth slow-down because its roots are structural, including a shrinking labour force and a considerable rise in real wages.

As to which of the potential impacts will come to pass, Chen's advice was to “wait and see”.