Devalued Yuan - Effect on Indian and World Economy

Devalued Yuan - Effect on Indian and World Economy

“… and then they fell like the nine pins.” Australian Dollar, Euro, Indian Rupee, BSE, NSE, Nikkei, etc. all took a dive down since the devaluation of Chinese Yuan Renminbi was announced. What was stated as an one-off measure was soon repeated again, sending what we term as ‘shock waves’ and ‘ripples’ in the Global Economy and Markets. People woke up to a ‘Black Monday’ in India. This depreciation is regarded as a sign of slowing of the Chinese economy and the decrease in its exports. This measure was seen as a means to fuel exports of China as Chinese economy is largely based on exports. A deeper analysis of the move can shed light on its positive aspects too along with its apparent negative ones.

Beneficial to Indian and World Economy

1. China is a huge consumer. With slowed economy, demand is decreasing and that led to dropping of oil prices. This is beneficial to India as we import oil.

2. Due to reduced demand in China which consumes vast amount of global natural resources, prices of commodities like copper, iron ore, etc. too are dropping. Thus imports will be cheaper for India as well as the rest of the world.

3. The cheaper imports will help to improve current account deficit of India.

4. The Chinese were always criticized for artificially pegging the Yuan as it gave China unfair advantage of keeping Chinese exports cheaper. With this depreciation, Yuan will be more market based and artificial pegging will be reduced. This is useful in the long term as out of all the major economies only China was tightly controlling the exchange rate instead of relying on market dynamics.

5. China has a huge share in world’s exports in a wide range of products, goods and services. Chinese products will be cheaper and thus it is beneficial for the consumers worldwide.

6. Indian rupee is depreciating. Though a negative impact, this will help in competing with cheap Chinese exports as Indian exports too will become cheaper.

7. It can be seen as an opportunity in disguise. India needs to make itself an easier place to do business. The investors who are now unsure of Yuan’s stability should be attracted by prospects available in India.

Detrimental to Indian and World Economy

1. Rupee depreciated with respect to the US Dollar. There is a need of more forex to stabilize the rupee or stop its slide if need arises.

2. Sliding rupee has led to exiting of investors from India. The first to flee are the foreign investors who have invested ‘hot money’. India relies on this ‘hot money’ investment for its current account deficit, though it is having a sizable foreign exchange reserve.

3. Chinese exports would become cheaper and would give a tough competition to Indian exports.

4. Many currencies have depreciated. There are chances of a currency war if this trend of Yuan depreciation continues. Each country will try to make their exports cheaper by depreciating their exchange rates.

5. Impact will be seen not only in market but also in other sectors. Low prices of Chinese goods would result in dumping of those goods in large markets like India.

6. China is second largest economy of the world. Devaluation denotes slow economic growth and decrease in exports. The sheer fear of effects of slowing down of world’s second largest economy is creating speculations and rumors that are affecting the market adversely.

7. Stock exchanges are hit hard. Investors are looking for safety in Gold. This affects the capital available for investment which fuels growth.

8. China and USA are huge markets and investors look towards them as a growth prospect, as consumption by these markets is fuelling growth. Slowing of China’s economy will lead the investors away from it, thus hampering world’s recovery from the global meltdown.

9. Decline in Yuan can weaken economic growth outside China as Chinese goods will become cheaper. Many countries are still recovering from the 2007 Recession.

Conclusion

The scene was like that of falling of dominoes in the global markets. Some may shrug it off and be optimistic that market would stabilize soon, but many are indulging in speculations and fears.

China has the largest forex reserves in the world. It can easily stop the slide of the Yuan using that foreign exchange. Their non-interference in this is increasing the fears and criticisms against them. Thus, many are seeing this move as a ‘beggar-thy-neighbor’ policy of the Chinese.

There is also a view that it is done to show the willingness of China to be a part of IMF’s Reserve Currency Asset (SDR). Though it is stated by the Chinese that this is done to move more towards market determined exchange rate, one has to acknowledge that this move on the part of the Chinese Central Bank is and will be having major effects on the Global Economic Scenario. The Indian as well as the global economy has to brace themselves against any further shocks. This can be seen as an opportunity by the Indians to provide safe and stable haven to investors, which are thinking of moving out of China.