*ISLAMABAD - Pakistan’s trade deficit with China may worsen as Beijing had significantly devalued its currency.*
The recent currency devaluation by China , which has brought the yuan-dollar parity to the lowest level since 2008, as part of its efforts to offset the impact of its tariff war with the United States, doesn’t augur well for Pakistan.
The yuan’s sharp devaluation means that, all else equal, Pakistan’s exports to China will become less competitive, while imports from China will become cheaper. The devaluation, combined with slowdown of the Chinese economy, is likely to exacerbate Pakistan’s trade imbalance with its single largest trading partner.
Exchange rate movements by themselves have a limited impact on competitiveness, which is essentially a function of productivity of the factors of production and technological and managerial efficiency with which the resources are combined. In the absence of productivity and efficiency, currency depreciation or devaluation normally doesn’t significantly shore up exports.
Thus during FY19, the rupee was allowed to shed its value drastically but exports remained stagnant.