Kathmandu, August 11

The Chinese authority’s surprising decision to devalue the yuan by 1.9 per cent is expected to make China-made goods, such as clothes, shoes and toys, cheaper in Nepal — albeit consumers here may not be able to reap its benefit immediately due to the closure of Nepal-China border points since the devastating quake of April.

China allows its currency to move in a band of two per cent above or below the midpoint set by the central bank. Today, the Chinese central bank fixed the midpoint at 1.9 per cent below Monday’s level. Hence, the exchange rate of yuan vis-à-vis US dollar stood at 6.2298 today, as against 6.1162 on Monday.

This devaluation was the most significant downward adjustment to yuan since 1994, The Wall Street Journal said. And, surprisingly, the move comes at a time when the US government has been saying the yuan is ‘significantly undervalued’ and ‘that fundamental factors for yuan appreciation remain intact, highlighting the need for further strengthening over the medium-term’.

“Weakening of yuan will definitely make imports of goods manufactured in China using China-made raw materials cheaper here,” said Arjun Prasad Gautam, general secretary of Nepal Trans-Himalaya Border Commerce Association. This is because every US dollar will now fetch more yuan.

“However, the devaluation will not bring down prices of all Chinese goods, as many products in China are manufactured using imported materials as well,” he said, implying that currency devaluation has made China’s imports expensive.

But even if all Chinese goods become cheaper here, Nepalis will not be able to take advantage of it immediately because the border points at Tatopani and Jilong in Rasuwagadi — the only two Nepal-China trading points linked by road — have remained shut since the quake of April 25, Gautam added.

Goods are not coming in from the border points because the quakes of April and May have damaged segments of Araniko Highway, which links Tatopani, while customs infrastructure in Rasuwagadi have also suffered damage.

“So, the impact of weak yuan will only be seen after these trade routes are reopened.”

While the devaluation is expected to provide some relief to Nepali consumers, who are heavily dependent on Chinese goods, the latest development is expected to exert pressure on Nepal’s exports to China, as more yuan has to be spent to purchase each US dollar or Nepali rupee. But since Nepal’s exports to China are limited, yuan devaluation is not expected to affect entire foreign trade.

In the first 11 months of the last fiscal year, which ended on July 16, Nepal’s exports to China fell 0.8 per cent to Rs 2.16 billion. In contrast, Nepal’s imports from China in the same period rose by 41.4 per cent to a whopping Rs 92.17 billion.

The currency devaluation may also work as a dampener for Chinese investors and tourists coming to Nepal, as each yuan will fetch less Nepali rupees.

China deems ‘a shift towards a weaker currency could help flagging exports at a time when many other efforts to boost the economy haven’t proven very effective’. It is said one per cent depreciation in the real effective exchange rate boosts export growth by one percentage point with a lag of three months. At the same time, one per cent devaluation against the dollar also triggers about $40 billion in outflows, Bloomberg said.