China's shock move to devalue the yuan could hit Singapore's already flailing manufacturing sector hard, some economists warn.
The Chinese decision - branded by some as a "beggar thy neighbour" policy - is likely to intensify competition for exporters in Singapore, Malaysia, Vietnam, Taiwan, South Korea and Australia.
While the People's Bank of China has downplayed the move as a "one-off correction", concerns remain over whether the world's second-largest economy will devalue its currency again if its exports continue to flag.
Singapore's manufacturing sector has already been hit hard by ongoing restructuring, rising business costs and the recent strength of the Singdollar, which has made exports more expensive.
"The yuan's devaluation could unleash yet more pressure on Singapore's exports and risk tipping the economy into a technical recession," said Bank of America Merrill Lynch Asean economist Chua Hak Bin.
Slowing Chinese growth is already hurting our manufacturing. At the same time, our growth is also encumbered by stringent manpower policies which the Government seems very reluctant to ease.
DR CHUA HAK BIN, Bank of America Merrill Lynch Asean economist
"Slowing Chinese growth is already hurting our manufacturing. At the same time, our growth is also encumbered by stringent manpower policies which the Government seems very reluctant to ease.
"Devaluing one's currency to shore up growth is a zero-sum game as opposed to cutting interest rates," he said.
"Usually you don't want to use your currency to do that because it's a 'beggar thy neighbour' policy. This is probably one of their last few bullets."
DBS economist Irvin Seah said the possibility of a recession here is low but cannot be discounted.
"Much will depend on whether the People's Bank of China continues to devalue the yuan, and on the pace of decelerating growth in China and the euro zone, as well as that of accelerating growth in the United States.
"Manufacturing, which accounts for a quarter of our GDP, will bear the brunt of yuan devaluation. But there could be spillover to the services sector, which accounts for close to two-thirds of GDP.
"China is Singapore's single largest export market, accounting for 11 per cent to 12 per cent of our total non-oil domestic exports. Our exporters may feel the squeeze or slight pain, but we're not yet at the point where yuan devaluation will drag Singapore into a recession."
There is some doubt over whether the near 2 per cent depreciation in the yuan against the greenback will do much to boost the competitiveness of Chinese exports as the yuan, in inflation-adjusted terms, has appreciated by 44 per cent against its trading partners' currencies since the end of 2007, according to a Reuters columnist.
Ms Selena Ling, OCBC head of treasury research and strategy, said the impact of China's move on Singapore's economy is unclear.
"Even if China is one of the most important markets for Singapore, the two countries do not compete directly in terms of the manufacturing value-chain."
Barclays economist Leong Wai Ho said the move will not affect Singapore's exports immediately, as most Asian currencies have depreciated in tandem.
"Competitive gains from nominal currency adjustments tend to be temporary, or less lasting than gains from innovation."