China’s surprise devaluation of its currency this week triggered fears about waning competitiveness of Asia’s exporters and cast fresh doubt on the health of the Chinese economy.
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Chief Economic Advisor Arvind Subramanian said today that there was no doubt that China was responding to its own internal development of slowing down of growth and exports in order to give its economy a boost.
While a limited yuan devaluation shouldn’t greatly change the eurozone’s inflation outlook, S&P said, the reaction in emerging markets is critical. They note, for example, that Thailand’s loss in market share of hard disk drive production to China over recent years could accelerate if the currency trends continue. Exports fell by 6 per cent, driven by poor global demand and the Greece crisis reducing purchasing capacity and sentiment in Europe. China wants its currency to be aligned to the realities of the economy and the world markets. Yet, India’s total exports to China never improved significantly. Trade linkage to growth in China is high and hence it is facing the heat of falling global demand. India’s key items of exports are petroleum products, gems and jewellery, chemicals and textiles. The current value of the Yuan could see goods from the manufacturing juggernaut dumped in Indian markets and seriously threaten already declining exports. The large overlap in markets and also products highlights the threat Indian exporters face from China.
“It may also have impact on FDI if China become more attractive destination vis-a-vis India”.
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The Chinese economy has been in a strong downtrend over the last couple of quarters. Chinese brands such as Xiaomi and Huawei already produce competitively priced handsets with decent displays and performance so a weaker yuan could make them even cheaper or allow Chinese handset makers to offer discounts. Yuan weakness would push down the price of Chinese steel, intensifying the supply glut in the global steel market, and driving down prices globally, Mirae Asset Securities said in a report. It is a bad signal for an economy that depends much on exports. Also, the long term impact may be muted because yuan weakness adds pressure on Asian countries, for many of which China is their biggest trading partner, to devalue their own currencies to stay competitive.
