It was not surprise for many who were expecting devaluation of Chinese Currency Yuan, however for them also the magnitude of devaluation was surprise. Yuan has weaken by 4.0 % against US $ within a period of two days. Market across the world has taken a note of the same.
However interesting about the same is, People’s Bank of China has termed Tuesday’s downward revision as “One time Correction” and of Wednesday’s as “Reflection of mass System”. The main reason for such harsh correction as explained by People’s Bank of China is, It has changed the way it calculates the reference rate, around which the currency is allowed to trade in and with such change now more market forces would be taken in to consideration while calculating reference rate. China has termed it as a market oriented reform. However economist considers it as only one move.
For China, it is two way important to make its currency driven by market forces. China had been looking for its presence by setting up a new Asian Infrastructure Investment Bank and is also exerting its forces towards joining the IMF’s (International Monetary Fund) basket of SDR (Special Drawing Rights) Reserve currency. China must bring the progress on liberalizing the Yuan spread to gain membership. For a currency to be included in the SDR, there are two criteria [1] Export Criteria and [2] Free Usability criteria, and both these criteria must be met at the same time. China met the export criteria in the year 2010 only when the last SDR review was held. However it was the free usability criteria where china struggled.
Another reason for bowing down own currency is its own performance. China is net exporting country and export accounts for almost 22 % of its GDP. However during last four months of current financial year Chinese exporters were not able to do much and they were far from the target. Economic growth in china has slowed markedly this year and will hit a 25 year low even if it meets its official target of 7 %. By making Yuan cheaper against US $, china actually made their product cheaper compared to other country product (specifically South Korea, India and Germany) and at the same time it has made imported product costlier. China by downgrading Yuan made Germen Luxury car costlier and made its export competitive. If this was the real motive of china under the cover of “rationalization of market forces”, then some expects currency war in Asia.
However Beijing has insisted that its motives are pure.
How it will affect to India?
There is a view that sharp devaluation of Yuan will make Chinese product cheaper and will dump the goods in Indian market, which shall affect domestic manufacturers. This shall raise the trade deficit with china.
In normal course falling rupee would have aided exporter. The fact that there are several products such as textile, gems and chemicals for which India and china both competes each other will surely adversely affect the Indian exporter.
The positive impact on Indian market may be seen by capital inflow due to volatility in Yuan, as Yuan is expected to depreciate further. There is also expectation that India’s import bill will come down by Yuan’s Depreciation, as India is net importer from China. However if Yuan continues to depreciate then it might create pressure on Reserve Bank of India to provide relief to exporters by lowering key interest rates.
How the World sees it?
International Monetary Fund (IMF) has extended the current bucket of SDR currency by more nine month and new bucket of SDR Shall be made effective from September 01, 2016. Earlier it was to be made effective from January 01st, 2016. Some economist interpreted it as IMF has provided more times to countries and market to adjust in case Yuan is included in bucket of SDR. While some interpreted it as IMF has provided china more time to make Yuan “Free Usable” and this depreciation of Yuan is one of the many moves to make Yuan “Usable”. World economy is looking for another such move before September 2016.
Under normal circumstances, the devaluation of Yuan would have a great negative impact on the Brazilian economy. But this is not normal circumstance as Brazil has also lost almost 23% of its value since January. If this is being considered as willful currency war Brazil would surely win the race.
United States of America interpreted is as unfair Export advantage. Additionally Yuan depreciation would impact an already beleaguered US Oil industry. China is the second largest consumer of oil after US, which makes china key players in international oil trade. With the devaluation of Yuan China has actually cut the purchasing power of countrymen on imported product and made the crude costlier for them. Demand for Oil could potentially slide as price increases. And with such huge oil consumer potentially sidelined, America’s oil industry could have tough road ahead.
Mr. Mc Millan (Well known Economist) well Said
“As I see it, the real message here is one of weakness. If the need to juice exports is that pressing, then the things in china may well be much worse than the outside world expects”
Samir Rasiklal Patel
Chartered Accountant
Sameerpatel2009@gmail.com
CAclubindia
