Strong yuan to aid Indian exports, not to hit inflows

China’s decision announced over the weekend to let the yuan appreciate further from levels established in July 2008 could boost Indian exports of a slew of goods including textiles and light engineering goods to other countries. India’s exports grew a healthy 35% in May, bearing out the revival after 13 months of negative growth, up to October 2009. A stronger yuan would also increase the capability of Chinese manufacturing units to import raw materials like iron ore from India and this would have to be addressed through necessary policy action, official sources say.

A clutch of Indian firms including public sector electrical equipment manufacturer Bhel could look forward to a reduced threat from Chinese companies in the local market. Of course, with the less-than-transparent pricing mechanism followed by the Chinese industry, how amenable China’s export prices would be to a marginal rise of yuan remains rather uncertain.

The increased inflow of money into Chinese assets might not actually dry up capital flows to India. Says A Balasubramanian, CEO, Birla SunLife AMC: ?Money will flow into Chinese assets with the anticipation of an appreciation in the currency.?

?However, that does not mean that India will lose out; money will come into Indian stocks also because at the end of the day, the inflows will depend on growth in the corporate sector. Commodities will do well because inflows into China will help their economy grow, although Indian exporters will gain and become more competitive, ” said Balasubramanian.

As for China, the move is expected to result in a renewed interest of global investors in its domestic assets. Its import-intensive companies (like steel units) and firms with dollar-denominated debt would also benefit.

However, some analysts have a slightly different take. ?In many areas, China’s enhanced ability for imports of inputs as a result of the currency appreciation could also have increase that country’s export competitiveness vis-a-vis similarly placed countries like India,? says Ajay Dua, India’s former industry secretary. ?To what extent Indian exporters will benefit would depend on the degree of appreciation of the Chinese currency,? says KT Chacko, director, Indian Institute of Foreign Trade. ?India-China trade basket is not particularly diverse. Commodities form a major chunk of the trade and they are largely supply-determined, rather than being price-sensitive,? Chacko added.

Says Ved Prakash Chaturvedi, CEO, Tata AMC: ?The appreciation of the yuan will be positive for Indian markets. Heavy equipment and capital goods manufacturers will become more competitive. Inflows into capital market will continue to be strong as Indian exporters too will become more competitive.? There is already a demand in India for imposing more controls on exports of basic commodities like iron ore to China.

China has kept the yuan at about 6.83 per dollar since July 2008, aiding the nation?s exporters and fuelling tensions with trade partners. The People?s Bank of China said yesterday that it will ?increase the renminbi?s exchange-rate flexibility? after the economy improved.

China?s pledge to make the yuan more flexible may boost shares denominated in the currency when markets open tomorrow, China International Capital Corp. and Societe Generale SA said.

? If it leads to appreciation for the yuan, it?s good news for the market,? Hao Hong, global equity strategist for CICC in Beijing, said on Sunday. ?Investors will want to get into Chinese assets because they will be worth more. It will also deflect political criticism and help stem inflation.?

The Shanghai Composite Index has tumbled 23% this year as the government pares stimulus measures and Europe?s sovereign-debt crisis adds to the risk of a renewed global slump. In 2005, the benchmark, which covers both A shares and foreign-currency B shares, rose 2.5% on July 22, the day after the government revalued the currency.

China Petroleum & Chemical Corp, Asia?s largest refiner, said on Sunday that it would benefit from yuan gains. ?Almost all of our sales are on the domestic Chinese market and we purchase a great deal of raw oil for processing from overseas,? the company’s spokesman said. ?If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one.?

Brokerage firm CICC expects airlines and paper producers to benefit most from possible yuan appreciation, saying it will reduce the cost of raw materials such as fuel oil and pulp. Shares of raw-material importers such as Sinopec, and companies with dollar-denominated debt, such as China Southern Airlines Co, had gained in trading after the revaluation in 2005.

However, the situation this year isn?t entirely the same. The central bank?s announcement it will scrap an effective peg to the dollar didn?t include a one-off gain for the currency. In 2005, the yuan immediately rose 2.1% as part of a policy shift.

The latest policy shift may support the currencies of Taiwan, South Korea and Australia, economies closely linked to China, over the rest of this year. A stronger currency because of ?gradual? appreciation will boost the country?s purchasing power, he said.

?Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role,? a statement posted on People’s Bank of China website said.