IMPACT OF YUAN ON INDIA AND WORLD ECONOMY

BY BHANUTEJA V.R

YUAN

EVOLUTION•  yuán literally means a "round object" or "round coin".

• During the Qing Dynasty, the yuan was a round coin made of silver

• Also called yuan dollar. a copper coin of the Republic of China, equal to 100 cents; dollar.

• A new yuan was introduced in 1955 , known as the renminbi yuan. It is the currency of the People's Republic of China to this day.

• 1 Chinese Yuan equals = 10.22 Indian Rupee

CURRENT SCENARIO

Why China devalued the yuan ?• to boost consumption and rebalance growth engines from

exports and investment • the International Monetary Fund (IMF) expressing reservations

on the renminbi’s inclusion in the special drawing rights (SDR) basket.

• The case for inclusion in the SDR basket is an important component in China’s strategy of internationalising the renminbi, by providing it a multilateral legitimacy as a benchmark currency.

• While currency and equity markets are likely to remain volatile for some time, and policy intentions remain ambiguous, it might be a useful to look at impact channels of both a slowdown in China and the policy responses.

YUAN IMPACT ON INDIAN ECONOMY

• The first, and an overwhelmingly positive, impact therefore of a slowdown in China’s commodities demand on India is through lower commodity prices.

• However, there is a flip side to falling commodities prices—the effects on companies in India operating in the minerals space, including steel, mining, selected chemicals, and some trading companies.

• Many large companies in the production space are quite leveraged, with debt-funded production capacities built up in the high-growth years.

• Stress on debt servicing ability is already high, and a further drop in commodities prices and a slowdown in exports will add to this.

• Indian manufacturers have already complained of non-market prices—maybe even dumping below cost—of China’s exports to India, and a further drop in China’s capacity utilisation in segments like iron and steel, bulk drugs and chemicals will lead to a further drop in prices.

• Besides imports, India’s exporters will also lose out on currency competitiveness to China in segments it competes directly with China—particularly textiles and apparels—as well as chemicals and project exports.

• India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20% in 2009-10 to 35% in 2014-15.

• India-China bilateral trade, which was as low as $2.9 billion in 2000-01, reached $72.3 billion in 2014-15 (exports: $11.9 billion and imports: $60.4 billion).

• India has a whopping trade deficit with China close to $50bn in 2014-15 on account of rising imports coupled with weak export dynamics.  

• In the joint statement between India and China during Prime Minister Narendra Modi’s visit to China in May 2015, it was agreed that both sides will take necessary measures to remove impediments to bilateral trade and optimally exploit the present and potential complementarities in identified sectors, including Indian pharmaceuticals, Indian IT services, tourism, textiles and agro-products.

1) Textiles: The biggest sector in which India competes with China head-on is textiles. Though China is moving on to high-end textiles, there is still a legacy segment where Indian companies can face competition on account of devaluation. Since margins are the smallest in the lower end of the textile segment, a devaluation of 1.9 per cent will eat into profits of some textile companies in India. 2) Chemicals: Chemicals, both organic and inorganic are largely produced in India and China. While margins in complex chemicals are higher, base chemicals attract lower margins. Low crude oil prices have already affected final prices, but China lowering its prices will impact Indian players. 3) Metals: Indian and global metal producers are impacted by a surge in Chinese exports. China is already facing a number of legal cases for selling its products at lower than cost price in many countries. Indian steel players have faced the brunt of the attack from Chinese imports. The recent hike in import duty has been nullified by the Yuan’s depreciation. 4) Consumables: Most of the electrical consumables in India are imported from China. These can get cheaper in the coming days. But Indian companies generally do not pass on the benefit but pocket the difference. Companies who are importing their components or the entire equipment are clear gainers from China’s move. 5) E-commerce: Mobiles, laptops, garments, toys and most of the goods that are sold by e-commerce companies are largely imported from China. They are the ones who will not be complaining about the fall in Chinese currency. One can expect some more mega- sale promotions being announced by e-commerce players in the days to come.   

Five Indian sectors that will be impacted by China's yuan devaluation

1) Rupee volatility2) Pressure on exports3) Dumping of Chinese goods

YUAN IMPACT ON WORLD ECONOMY

• Selloff in Indian bonds, in the absence of any significant buying interest, typically results in enhanced price volatility of Indian bonds and a commensurate move in the rupee.

• China’s role in the global economy has increased rapidly and disproportionately in trade.

• Its share of world gross domestic product was over 10% in 2014.

• In exports, its share is over 15% and in imports—although a bit lower than in 2014—is over 11%.

• China accounts for close to half of the global consumption of copper, aluminum and steel, and more than 10% of crude oil.

 

• There are indirect consequences as well.

• China holds about $1.5 trillion of its reserves in US securities. Another half a trillion is held by Russia.

• This has implications for US sovereign yields, already on the way up with expectations of a rate hike by the Federal Reserve in 2015.

• A move up in developed market rates will have consequences, via reduced capital flows on emerging market yields as well and the ability of central banks of these countries to cut rates significantly, despite slowing growth.

What the yuan devaluation means around the worldAfrica

• China is now the number one trading partner for most African countries.

• In an effort to make the buying and selling of goods much easier, some states introduced the yuan into their foreign exchange system.

• In 2011, the Nigerian Central Bank pledged to store between 5%-10% of its foreign reserves in yuan, alongside dollars and euros.

• Nigeria believed that looking east would help protect the local currency, the naira, against the volatility of oil prices set in dollars.

• Later on Kenya, whose port is a major gateway for Chinese goods, announced plans to set up a clearing house for the Chinese currency.

Brazil

• Under normal circumstances, the devaluation of the yuan would have a huge, negative impact on the Brazilian economy.

• China is Brazil's main commercial partner, and a weaker yuan would mean a Brazilian loss in its terms of trade with the Asian giant.

• But these are not normal circumstances in Brazil, as the country is facing its worst economic downturn in two decades.

• One of the few positive side-effects of this is that the Brazilian real has dropped to its lowest level in 12 years, favouring Brazilian exports abroad.

• While the Chinese currency has dropped about 3% since January, the Brazilian real has lost 23% of its value.

• If this were a purposeful currency war, Brazil would surely be "winning" in the race to the bottom.

• Brazil's economy is in crisis largely due to China, but this has more to do with the overall slowdown of the Asian economy and the end of the commodities boom cycle in recent years than just currency fluctuations.

1. It gives the Federal Reserve another reason to delay raising interest rates.

2. It's bad for commodities—and good for commodity buyers.

3. The falling yuan may force other countries to devalue their currencies.

4. China's overall impact on U.S. growth will be small.

5. China's real goal may be prestige—and some longer-term stability.