Yuan and India

·   Clocking at more than 10% annual average growth rate, following the normal cycle of economics, China has reached a Saturation point.

·   Now China’s market is---

(i)                Controlled by the Centre

(ii)              China doesn't let its currency trade freely in financial markets as the United States does.

(iii)            Instead, it links the Yuan's value to a basket of currencies the composition of which is secret but is believed to be dominated by the US dollar.

(iv)             Then it restricts trading to a band 2% above or below a daily target set by the People's Bank of China.

(v)               So majorly export-driven; unlike that of India which is –Consumer based/Domestic consumption.

·   Devaluation of Yuan first started in 1994, then in 2007 and this is the third time Chinese currency has been devaluated .

·   The fall in the Chinese stock exchanges in a mere bursting of the Real State Bubble which existed to burst for a long time.

·   THE Chinese government tried infusing capital in the market but this failed to boost the economy---, So the government decide to devalue its currency to boost the export and give a trust to economy.

     Now, devaluation (by 2%) will lead to the make its manufactured products cheaper for other countries to buy,---boost  exports, and expected to help revive its economy.

[**when a currency is de-valued, exports become cheaper, and import becomes costlier—with devaluation, more Chinese Yuan has to be equated with the same amount of dollars. Hence when China exports any item, (in exchange of Dollars, say) they get paid in Dollars, which triggers them to export more, and continuing this process with an appreciable extent leads to stabilization of the exchange rate]

·   

     Other reasons for the fall of exchange rate—

(i)     Recession across the world has now started taking a toll on China.

(ii)   The Yuan has been rising even when market forces say it should be falling.

(iii)  Worried Chinese have been moving money out of the country, putting downward pressure on the Yuan. Yet the Yuan has remained up anyway because of its link to the dollar, which has been rising

(iv)  Now this had a major negative impact on the Chinese exporters which became costlier and had to suffer much on the go—their products became more expensive overseas.

(v)    To contain outflow of dollars and give a boost to export based economy

(vi)  To achieve market dominated (right now value of Yuan is decided by state) agenda of the present regime

(vii)    It is also under pressure to reform its currency policy as it pushes to become one of the International Monetary Fund’s “special drawing rights” (SDR) reserve currencies---thus, aspiration of Beijing to include Renminbi in the IMF SDR basket

·  

     Consequences--- (India-Based)

Positive Impacts—

•                 Growth of China is necessary for our own interest, as , China's slowdown will heart not only metal industries but also cotton producers of western region
•             Devaluation will make Chinese import cheaper, as producers will cut the price to boost demand. Therefore, benefit to Indian citizens but its real effect will take time
•             Inclusion of Yuan in IMF SDR basket will benefit India. India will not have to depend only on dollar for international trade
•             Again devaluation will be linked to the initial fall of rupee, which will eventually prove to be beneficial for the Indian exporters and sectors such as IT and pharma are seen gaining from the depreciation in the rupee.

Negative consequences are however more on the list

• Rupee volatility: devaluation of Chinese Yuan will threaten stability of rupee, which has already seen all time low at $67 in second half of 2013.---- Raised dollar demand globally---India Rupee thus weakens-- Imports will become costlier--- Inflation. This will force the Reserve Bank to hold on to high interest rates, which will hamper the ongoing economic recovery.
• Since India runs a trade deficit (imports are more than exports), chances are the current account deficit will also rise, which will further pressure the rupee. Falling rupee is bad for those companies that have dollar-denominated loans and also for foreign flows because stock market returns become unattractive.
•  Pressure on exports—In the normal course a falling rupee would have aided domestic exports, but this possibility gets misted with a global slowdown and the further devaluation of rupee. Already China and India compete stiff in matters of exports for items like textiles, gems and jewellery which is bound to 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
•  Dumping of Chinese goods—Devaluation of Yuan will help China to dump goods in the Indian markets /sold at prices below the cost of production or what they sell in domestic markets. That will impact the domestic manufacturers. Now India is Domestic manufacture based economy, and hence would be hard-hit.
• Trade deficit—India already has a Large trade-deficit of around 48 billion $ which is expected to broaden more with exports on the rise and decline of imports
• India imports 80% of its crude oil requirements, and a weaker rupee would mean that our import bill would not fall as much as historically low global oil prices would warrant. This would prompt oil companies to hike petrol and diesel prices. Costlier transport fuel will knock up prices of most goods and stoke inflation.
• To add to the list, computers, imported mobile phones and gold will become dearer. Foreign education and foreign vacs will become costlier too.
• Banking and Finance---Falling rupee will hit the profits of many companies, mainly those who have borrowed Dollars from overseas banks, and thus could be worst hit as repaying loans would become dearer.
• It will be quite tough for India to again revive its economy as Devaluing its currency would result in increase in prices of imported goods such as petrol and diesel, which would again result in increase in prices of consumer goods, and hence holistic harm in its economy.
• Among the long term impacts, Foreign investors might suck their investments out of India and  rather invest in safer places/ near to their country.

Recent move will not have sudden impact on India as we already have more than $320bn as foreign reserve. But this should not drive our policy makers into complacency and they should be proactive enough to bring necessary policy in place to avert its long term impact.

Global Implications--
Setting up of a Currency War--

Now what is Currency war?

---A Currency War is actually a competition among the nations to devalue its currency, so that the price of exports reduce drastically and help in increase in its exports. Thus a strong of devaluation by other Central banks to help their exporters.

Steps to be taken by India—

• We’re not without options. The Reserve Bank of India could sell dollars in the market to increase the rupee’s value. It has plenty to spare -- India’s foreign exchange reserves are $353 billion.
• There are several other measures possible that range from floating a sovereign bond to raise money from NRIs to making the import of luxury goods costlier by imposing duties on them.
• Apart from the above, faster implementations of projects with steady clearances; More industrial friendly atmosphere and attracting more foreign investments can help the nation to deal with this problem.