Chinese Devaluation Of YUAN & Likely Impact

Chinese whispers they say are designed to create confusion. More so if it is the Chinese themselves creating it!

Could this be……about the Chinese economy…? God forbid. There is far too much for the World to lose if China goes down than us losing a bit due to its currency devaluation.

But how else does one read this? Within a span of a fortnight China is again in the news….for all the wrong reasons. First it was the Stock Market Crash…and now this devaluation (they call it Correction by the way!).

With its economy slowing and exports getting hit by as much as 8.3% due to domestic price rise, this was expected in a way…but not in such a way as this!

August 11 was the date when all started. It was a controlled drop of the Yuan by 1.9% against the USD- nothing alarming it seemed. When the picture finally emerged, it became apparent that the Yuan fell between 6.11 to 6.22 against the dollar, marking an overall fall close to 2 to 3% - something certainly alarming!

This was the first time in three years that the Yuan fell so low against the USD. In fact, it was the biggest ever in the last two decades!

And it does not end here. Given that China contributes close to 15% of the World’s GDP put together, even a 2% devaluation with its multiplier effect snowballs into a huge sum. There is now a fear in the International Markets that countries in the ASEAN and SAARC regions may well be tempted to competitively devalue their currencies to keep pace with what China has done and all this might lead to a global slowdown.

And this still does not stop the Chinese from further devaluing their currency!
Given the statistics and the scenario, how does all this affect us in India?

• Imports from China to India or any other country makes sense given the price advantage whether in Yuan or USD! In India, those dealing with electrical and electronics could do a killing given that the prices of copper too are down!
• Chinese goods becoming cheaper in India may be good for a particular section but may wipe out the others as dumping may openly be resorted to now! Manufacturing may become uncompetitive and this may affect revenues as also employment. Paper, steel, chemicals are some of the areas where dumping is a real possibility.
• Chinese goods shall now compete with Indian goods more sharply in overseas markets after this devaluation affecting our export competitiveness. But in other markets where the Chinese influence is marginal, this indirect devaluation of the INRs against USD can result in increased exports!
• Exports to China against USD may not be such a good idea anymore for anyone including India which supplies raw materials such as Iron Ore, Copper and Bauxite. The same goes for Australia, South Africa and Brazil. The Arabian Gulf which supplies China close to 10% of the world’s crude oil production shall also stand adversely affected.
• The flip side of the above scenario is that since China may find importing of raw materials including crude oil onerous, the prices are likely to dip- a very positive development for India and the rest of the world! We burn close to USD 140 billion on crude oil and given our volumes, even a drop of USD 1.00 per barrel can result in saving close to USD 1 billion! Certainly not small! Same goes for coal from Australia and bulk minerals from the rest of the world!
• If this devaluation is anything but course correction, ie. a deeper malaise in the Chinese financial and economic system as was always expected given the shroud of secrecy China maintains over everything, India could well be the next back-office production unit with Shri Narendra Modi’s “Make in India” dream finally materializing big time! But then the Big “IF” remains!

There is this other school of thoughts which takes this entire devaluation issue in a more studied manner. Apparently given the Chinese Government’s desire to make the RMB an international currency figuring in the list forming the IMF’s SDRs (Special Drawing Rights) thus placing it close to the USD and Euro, the IMF could have directed the Chinese Government to do certain course correction besides value corrections to their currency to be taken seriously. If this is the primary reason, there is no way that this devaluation may affect the Chinese economy adversely in the long run.

For the present, enjoy the windfall coming your way in the form of reduced prices, oil or otherwise…and increased exports! The rest, only time will tell!