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Yuan Devaluation: SINO-US NEXUS TO HIT INDIA, By Shivaji Sarkar, 15 August, 2015 Print E-mail

Economic Highlight

New Delhi, 15 August 2015

Yuan Devaluation


By Shivaji Sarkar


Global slowdown is official. The devaluation of the Chinese yuan by 2.5 per cent confirms it. Is it a currency war? On the surface of it may be not. It could have been a war had it hit the US, but it isn’t so. Instead the US is the biggest gainer, China being its largest trade partner. The US consumers, dependent on Chinese imports would benefit the most paving the way for the US Federal Reserve to go coolly on rate increases as inflation in the country would plummet. And this would be detrimental for India.


China has not done a bit to ruffle the US feathers. Rather its action is framed as per prescriptions of the US and the International Monetary Fund (IMF). They had long sought this devaluation and had been insisting that the yuan was overpriced, as China had been propping it up. It appreciated by 14 per cent against a basket of currencies. It was straining China’s export sector and pushing up inflation in the US market, despite strengthening of the dollar, dependent on Chinese consumer goods.


The present downward trend seems to be in tandem with America’s wishes and is likely to benefit the US most particularly on the eve of revising its monetary policy. China’s net gain would be continuation of its exports to the US and possibly can even increase a bit as its goods would now be cheaper. A rate increase by Fed Reserve on the contrary has serious implications for India.


If at all it is a war, then it is against Asian neighbours. It is to hit India and other Asian economies significantly. Cheaper Chinese goods would further rock the Indian market. No wonder, it has hit the rupee hard pushing it down to below Rs 65 to a dollar and created a virtual upheaval in the market.


If China’s devaluation deepens, pressure to weaken currencies could become particularly intense in other Asian nations that export large amounts to China or compete with Beijing in other markets. Asian currencies tumbled on Tuesday, notably the South Korean won, the Australian dollar and Thai baht, as investors bet China’s move could lead to further monetary easing in those nations. Many Asian nations have cut rates this year and could be forced to take further action in the coming months.


New Delhi needs to look for a strategy to counter the Chinese. India imports heavily from its eastern neighbour. This may swell the trade deficit further, which is touching $50 billion. The imports are worth $60 billion. This devaluation is likely to push the deficit further up as cheap imports will be initiated by Chinese manufacturers irrespective of dumping safeguards, says DK Joshi, senior director and chief economist, CRISIL.  


Apprehending dumping of steel, as the Chinese make would be much cheaper than India-produced steel, the Government on August 13 itself raised customs duties on certain steel products by 2.5 per cent, equal to the cut in yuan value.


India’s overall exports have contracted for seven straight months until June. Domestic players such as Tata Steel and JSW Steel have been urging the Government to take more measures to check cheaper imports and save the domestic industry. The import-duty hike is only likely to keep the prices of imported steel to the previous level, which is in any case considered high by the Indian industry.


The Government has problems in meeting the demand. It has to go as per the WTO norms. If it goes beyond, the WTO or competitors can initiate many legal moves to embarrass India. What the industry is terming as dumping, the Government has to prove that it is as per technical and legal norms.


Additionally, India may find its ‘Make in India’ go into a tizzy. With cheaper imports flowing in directly and through porous borders, Indian manufacturing, already hit, would now find it more difficult to counter it.


As this move may also boost slowing the Chinese economy, investors who had been mulling putting money in India may have second thoughts. If Chinese exports to the US and the West increase, it is likely to clear Chinese warehouses of stacked goods and may give boost to new manufacturing. It can create new jobs and may make China more attractive.


The problem is not restricted to a mere import-export imbalance. There are several sectors where India competes with China to sell to the world. In the normal course, the falling rupee would have aided domestic exports, which have contracted for seven straight months until June 2015. However, a rise in domestic exports would not be easy because of a global slowdown. The fact that China and India compete for several export items such as textiles, gems and jewellery, bicycles, and tyres will also go against domestic exporters. 


The economic slowdown in China, which is among the top five countries for Indian exports, is another negative for Indian exporters. Textile manufacturers and chemical producers might have it a little tougher now because in the global marketplace their goods might become less attractive than those from China.


The Dalal Street is reflecting these woes. Shares of these companies as well as those of tyre manufacturers are tumbling. Of late, cheap Chinese tyres have hit sales of domestic manufacturers. A further fall in price would force companies to cut corners.


The strengthening dollar and fall of yuan are a double whammy. As it hits the rupee that has become more volatile it might send occasional shockwaves here. It would make all imports, including petroleum dearer. The little relief that Indian consumers had got through fall of official price index may disappear. The impending fortnightly cut in domestic selling price of petrol and diesel may be put off. Inflation may return.


There are chances that the RBI would have to hold on to high interest rates. A cut in rate may lead to capital flight to the US as it is bound to raise the rates. Besides, as the country has a high trade deficit, chances are that the current account deficit will also rise. This will further pressurise the rupee. This has many implications just not only in terms of imports but also for those companies with dollar-denominated foreign loans. It can have a negative impact on FII flows particularly to the stock market as returns would be less attractive.


Unfortunately, India has not yet created hedge against direct and subtle onslaught against Chinese moves. Now it has to develop a strategy for developing an independent path for Indian economy. Mere changes in monetary policy would not help.---INFA


(Copyright, India News & Feature Alliance)

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