Domestic Economy

Should Iran Be Worried About Yuan’s Depreciation?

Should Iran Be Worried About  Yuan’s Depreciation?Should Iran Be Worried About  Yuan’s Depreciation?

Is the depreciation of the Chinese yuan bad news for Iran? Some say no while others contend the government should be prepared.

Yuan has fallen 5% since August when China’s central bank shifted to a currency devaluation policy. Beijing’s aim is to spur the country’s exports as a weaker Chinese currency will translate into cheaper imports for the country’s main trading partners.

Considering the fragile state of Iranian industries, many of them could go under from competition with Chinese goods, if imports become even cheaper. However, cheaper imports would also mean a better standard of living for cash-strapped Iranian households.

“The drop in the value of yuan will not have any short-term impact on Iran’s economy,” Majid Reza Hariri, deputy head of Iran-China Chamber of Commerce, was quoted as saying by Mehr News Agency.

“Although China’s national currency has recently followed a downward trend, it coincided with a nosedive in rial’s value at a faster pace,” he added.

The rial has lost roughly 15% against major currencies in the past six months, as anticipation of the lifting of sanctions against Iran’s nuclear energy program, along with the government’s weaker position in the market due to falling oil revenues boosted demand for foreign exchange.

According to Hariri, yuan’s weakness will not make as much a difference in the value of Iran’s imports from China as it will for China’s biggest customers, namely the European Union and the United States.

As of 2013, the EU has been China’s largest trading partner and China the second largest trading partner of the EU. In 2014, the EU imported over €302 billion worth of commodities from China. The United States imported $467 billion during the period.

Iran’s imports from China are dwarfed by those figures. Its imports stood at $13.7 billion in 2014. Furthermore, imports dropped in recent months due to a slowdown in domestic industries and falling demand for consumer goods, among other reasons.

Figures released by China’s General Administration of Customs show that, from January to August, Beijing’s exports to Iran declined 27% compared with the first eight months of 2014, standing at $12.2 billion.

But the saga does not end there, as China’s imports from Iran have fallen more compared to its exports. China’s imports plunged 40% to 11.8 billion in the eight-month period, over the similar duration of the previous year.

Balance of trade, which for long was in favor of Iran, has recently tipped in favor of China.

Iran’s trade deficit with China could even widen, as the cheaper yuan paves the way for more imports in 2016.

“China is Iran’s top trading partner and yuan’s depreciation will definitely boost Chinese exports to Iran. So, in the short run, the government should review policies regarding imports from China,” economist Morteza Allahdadi was quoted as saying by Tasnim News Agency.

On the other hand, the falling value of yuan might give rise to capital outflows resulting from lower investor confidence and, thereby, a downturn in Chinese industries.

That is not a good sign for Iran and other exporters of energy and raw materials to the world’s second largest economy, according to the economist.