China’s seafood exporters rejoice – for now
China’s repeated moves this week to devalue its currency have been welcomed by seafood exporters across the country, but even though the value of the yuan has dropped against the dollar the relief will only be temporary for shippers of tilapia, shrimp and other processed seafoods from ports like Dalian and Qingdao.
Ultimately, the yuan remains significantly stronger than it did a decade ago, and it will remain so as the Chinese government slowly shifts toward its currency’s full convertibility – in other words, letting the market set the value of the currency.
Full convertibility for the yuan has for the past decade been a holy grail of China’s leadership because it will allow the country to trade using its own currency – Chinese seafood exporters today are invariably paid in dollars, with all the risk that comes with that (risk which Beijing can do little to influence). China has said it wants to have a fully convertible yuan by 2020. Thus the country’s huge seafood trade would then be conducted fully in yuans.
Tweaking the yuan’s value in the meantime seems like a last-stand attempt by the old timers in China’s Communist Party leadership who still want to use old-fashioned intervention to direct the economy. This goes against all the pledges and the general policy thrust of the strong-man president, Xi Jinping, who has said the market, not the state, will increasingly set the direction of China’s economy.
The market will set the future direction of the country’s currency but also its industry. An even greater problem than currency, though, is the nation’s massive overcapacity in numerous export-oriented industries, including seafood processing. For several decades, China’s government used cheap credit from state-run banks to build swathes of factories which absorbed labor and generated tax revenues.
Today, however, China is having to liberalize its interest rates in order to liberalize its currency controls. That means that banks have to operate on more commercial grounds, and wild-fire lending according to government mandate is no longer an option.
What’s more, China no longer has the labor to run all the factories built in the 1980s and 1990s. Anecdotal evidence suggests widespread smuggling of Burmese and Vietnamese laborers to staff canneries and filleting factories in processing hubs like Fujian and Guangdong in the country’s south – simply because factory owners can’t find or can’t afford local hands.
While tinkering with its currency this week is a short-term measure to show it’s doing something to help the exporters, for the longer term China has come up with grand plans like the “One Belt Two Roads” scheme (essentially a recreation of the ancient Silk Roads over land and sea) to fund infrastructure and thus offload some of China’s industrial overcapacity on regional states. Giant road and rail building schemes – and ports – will also integrate these countries into China’s orbit, goes the logic, with railroads enabling next-day delivery of Chinese freight right across Southeast Asia.
At the same time China has vowed to shift the emphasis of its economy away from exports and infrastructure to one where domestic consumption of goods and services creates the economic growth. Liberalizing currency controls will – goes long-held government logic – help strengthen (not weaken) the yuan to further stimulate consumption. This suggests the recent devaluation of the yuan is a stop-gap measure and a concession to government hardliners who want more state intervention in the economy.
In the long run China will have to remove the overcapacity that haunts many of its industries, including seafood processing. China can no longer afford the kind of subsidies that encouraged these industries to sprout in the past, and the industries themselves can’t afford the wages. Lowering the value of the yuan will give some temporary relief, but it won’t solve much more fundamental problems that hamper Chinese seafood exporters.