1. China joins currency party, ‘Market-oriented’ yuan spells more trouble for India

China joins currency party, ‘Market-oriented’ yuan spells more trouble for India

For India, the timing couldn’t have been worse since this will make Chinese exports to India even more competitive and, to the extent there is competitive devaluation by others, the export market gets that much more difficult.

By: | Updated: August 12, 2015 3:32 PM
A Chinese yuan sign is seen at a currency exchange shop in Hong Kong on Tuesday, Aug. 11, 2015. China devalued its tightly controlled currency following a slump in trade, allowing the yuan's biggest one-day decline in a decade. (Photo: AP)

A Chinese yuan sign is seen at a currency exchange shop in Hong Kong on Tuesday, Aug. 11, 2015. China devalued its tightly controlled currency following a slump in trade, allowing the yuan’s biggest one-day decline in a decade. (Photo: AP)

Though the official Chinese explanation for the sharp devaluation on Tuesday was that it was a one-off event aimed at reflecting the true value of the currency – vital if the IMF is to accept the yuan in the basket of SDR currencies – the fact that the yuan was allowed to fall for the second day makes it clear the impact is yet to play out fully.

While S&P has agreed with the official stand of the Chinese government and said the move is more a structural reform than a competitive devaluation, a move towards more market orientation would suggest the devaluation would continue, even if it wouldn’t be anywhere near as steep as on Tuesday.

With exports falling over 8% in July and the economy slowing, China needs a growth engine, and all others including rate cuts and liquidity injection haven’t worked. Indeed, with so many nations devaluing to stay competitive, this is probably a case of China rejoining the currency party after having stayed away from it for a while – the 2% devaluation has to be seen in the context of the real value of the yuan appreciating 9-10% over the last year. While the devaluation suggests the economy is weaker than earlier thought and has sent stock markets across the world into a tailspin, the fall in Asian currencies – the Australian dollar fell 1% to a 6-year low, the Singapore dollar to a 5-year low, the Indonesian rupiah and the Malaysian ringgit fell to lows not seen since the Asian Financial Crisis in 1998 – suggests a period of volatile currencies even if a full-blown currency war is not on the horizon.

For India, the timing couldn’t have been worse since this will make Chinese exports to India even more competitive and, to the extent there is competitive devaluation by others, the export market gets that much more difficult. The further collapse in commodity prices will also put pressure on banks which are holding, for instance, large loans of steel firms. Not surprisingly, the rupee weakened to its lowest level in 2 years.

The RBI, however, would do well not to intervene to support the rupee too much – it needs to ensure there is no sudden collapse – since once it is trade-weighted, the rupee has appreciated in even nominal terms over the last year; in real terms, the appreciation is even higher. While this makes a difference in India’s competitiveness in certain commodities, the biggest reason for the collapse in India’s exports – they fell around a sixth in the first quarter of FY16 versus FY15 – is really the slowing in global growth. Also, while looking at the export performance, it is important to strip out the impact of commodity prices – about a fifth of India’s exports are petroleum products whose prices have more than halved in the last one year. Once you do this, you find that nearly three fourths of the fall in India’s exports basket in the first quarter of the year is related to the fall in commodity prices – of petroleum, iron ore and gold. Given that other countries are devaluing, though, India will have no option but to let the rupee slide. If the rupee falls too much, though, the impact on India Inc’s borrowings will be large. So, RBI will have to remain watchful.

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Tags: IMFYuan
  1. Willwin
    Aug 12, 2015 at 4:30 pm
    RBI may be forced to change its stance and allow the rupee to depreciate. If RBI resist market will soon force the same. Weak rupee, strong export and restricted imports are the only way to save India from the currency War China has forced upon the region.
    Reply
    1. K
      K.S.Subramanian
      Aug 12, 2015 at 5:13 pm
      So China loudly proclaim that World economy is whay China dictates.
      Reply
      1. K
        K.S.Subramanian
        Aug 12, 2015 at 5:14 pm
        t
        Reply
        1. S
          Sadasivan
          Aug 12, 2015 at 3:55 pm
          The RBI should INTERVENE and keep the Rupee stronger.There is no point "growth"[Indians becoming poorer] .the 2008 stimuli and the consequent fall in Rupee from 44 to 67 to the US Dollar has shattered the confidence of Indians on their leaders,like M M Singh,RBI Chief,like Subba rao. Indians have lost a huge amount oof wealth after the 2008 weakening of the Rupee,which has merely transferred the wealth of Indian non-exporters to exporting ones and the MNCs. Meanwhile the Speculators made merry in Stocks.
          Reply

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