Yuan Devaluation: Don't Lose Sleep, India, Tomorrow Is A New Trading Day
The talk of the day is obviously the sudden devaluation of the Yuan by the Chinese Central Bank ostensibly to set the mid point of the currency in line with market movements. This move of a 2% depreciation has led to a weakening of Emerging Market currencies across the board and raised concerns about the actual state of the Chinese Economy.
Chinese exports fell 8.3% last month, however despite that there was a trade surplus of $ 44 billion. China is the holder of the largest forex reserves in the world at over $ 3.5 Trillion, nearly 10 times that of India. It has seen a fall of around $ 350 billion since the peak but still remains a very huge number. The reduction in the forex reserves has been more due to capital outflows which have picked up rapidly after growth has plummeted and a series of mis steps by the Chinese authorities with regards to their financial markets.
The question then is what impact will this have and what is the purpose of this move. The impact on Chinese exports might not be too much as firstly this devaluation after a very long time is minuscule as compared to the way most other emerging market currencies have fallen over the last 2-3 years. Secondly for a country which has such a huge trade surplus and huge forex reserves this reflects a lack of confidence in their own economy and could actually accelerate capital outflows.
Armchair analysts are out with predictions of how a 1.5% fall of Chinese currency will lead to a sharp increase in dumping etc. However the INR has also fallen nearly 0.8% in sympathy and now down 5% over the last one year. It is hard to see a major impact of this on Indian stock markets or the economy unless Yuan depreciation becomes a trend which seems unlikely at this stage.
So enjoy the doomsday predictions and analysis till they last and we have a new trading day tomorrow.
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MBA,IAP : Managing Director at Asia Aviation Associates
9 年While optimism is good, one should see how astutely the fiscal and trade policies together with financial prudence is combined to leverage each and every aspect of the economy by our big neighbour. Did we really foresee this when we made our plans for economic development? Did we think, we only will progress and others not? The whole world is affected with a small step by China. "Devaluation"
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9 年INR exchange rates are quite market driven save management of volatility by RBI, so we are protected against competitive devaluation of the INR. Also, devaluation/ significant depreciation of INR may not really be useful in the current context as (1) we are net importers by a large margin and depreciation will mean higher costs, (2) leading to impact on inflation and (3) consequent rise in interest rates which will (4) hurt exports and trade balance eventually neutralising any gain from pure devaluation.
Head Of Research at Profitmart securities
9 年Well written Mr Sandip i always like reading your articles and views Regards Avinnash
Crisp and effective article.