 "China's yuan devaluation worries Indian industry")
China’s decision to delink its currency yuan from the dollar and change the reference rate have had a ripple effect across commodities.
The People’s Bank of China’s move led to the yuan’s 1.9 per cent devaluation against the dollar, taking the Chinese currency to its lowest in almost three years. According to Bloomberg, this was the biggest one-day loss since China unified official and market exchange rates in 1994.
Mitul Kotecha, analyst, emerging markets research, Barclays, said in a note that Chinese currency was now on a potentially weaker trajectory. “The (currency) fixing will be more dependent on the market and could move on a more volatile and potentially weaker trajectory than earlier. Asian currencies are set to stay under pressure,” said Kotecha.
However, later in the day, Greece and its creditors agreed on a euro 86-billion bailout deal, which strengthened the euro. So, the dollar index fell to the 97 level, resulting in a strengthening in the prices of gold, crude oil, etc. Gold prices jumped from the level of sub-$1,100 an ounce to $1,110. Crude oil also saw gains but reports of a high inventory and higher Iran output played spoilsport.
Following the China development, copper, nickel and tin dropped at least 2.5 per cent in London. Aluminium slipped two per cent after Goldman Sachs Group Inc cut its price forecast for the white metal.
India’s rupee also declined — to a near-two-month low of 64.21 a dollar, compared with 63.87 on Monday. The currency had ended at 64.25 on June 16.
State Bank of India Chairman Arundhati Bhattacharya said: “Major global currencies are depreciating, but our currency is stable. So, our exports are under a lot of stress. We have asked the regulator to allow foreign-currency loans for exporters, instead of rupee loans, because the value gets eroded if the loan is in the domestic currency.”
“Indian clients who are exporting to developed countries like the US are doing good, as the demand there is increasing. However, those who are exporting goods like cotton yarn and iron ore to China are facing huge challenges," she added. "Banks, the government and regulator have to think in unison as to how we can help the sector so that they manage to keep their heads above the water.”
Suresh Nair, director, Admisi Forex India, said: “Competitive devaluation by China will push countries like India to also devalue, in a bid to remain export-competitive. The government might be comfortable with the rupee being in the range of 64-65 a dollar. The challenge which China faces today is that a lot of its manufacturing activities can move out to other Asian countries. It, therefore, has to maintain its export-competitiveness.”
Religare Securities President Jayant Manglik said: “Following a depreciation of the Chinese currency, the rupee is also likely to depreciate, and the dollar's strengthening on the expected rate increase by the US Federal Reserve will accelerate the process. This should help improve exports. However, this also means costlier imports and inflation.”
The rupee on Tuesday was down 0.5 per cent, but not as much as the devaluation in China’s yuan. A weaker yuan, however, is likely to affect India’s exports, and take away market from domestic producers, with Chinese goods turning cheaper.
According to Reuters, the Chinese central bank described it as a “one-off depreciation”, based on a new way of managing the exchange rate that better reflected market forces, but economists said the timing suggested it was also aimed at helping exporters.
Indian players worried
S C Ralhan, president, Federation of Indian Export Organisations, said: "The devaluation will affect India's exports, not only to China but also to other countries, with increasing competitiveness of Chinese exports. This will also lead to higher imports from China, which has excessive capacity in diverse sectors of manufacturing. We have to keep our trade defence measures ready to address the dumping, if that happens."
Firdose Vandrevala, executive vice-chairman, Essar Steel India, echoed the view. "The devaluation of the Chinese yuan appears to be a step taken to counter a slowdown in their domestic market and to stimulate exports. We have to ensure that India is not the dumping ground, like it became for steel recently. Indian industry suffers from relatively high interest rates and logistics costs compared to international players. The government must ensure fair play domestically and provide global competitiveness support."
Tyre makers are equally worried, given that one in every four tyres sold in India is made by Chinese companies. There are other issues - much bigger ones - that many countries may have to face.
"This (yuan devaluation) might lead to a currency war, as is visible in huge depreciation in several currencies. The huge volatility will increase the hedging cost for Indian exports as well," said Ralhan.
Traders dealing with China fear an increase in dumping of commodities like paper, steel, chemicals and petrochemicals, besides electric goods imported from China, as lower currency incentivises that country's exports.
Janak Ladhani, managing director, Sonkamal Enterprise, an importer of chemicals like phenol, said: "Importers were already facing a huge pressure due to a continued fall in chemicals and petrochemicals after a sharp fall in crude oil prices in the past two months. China's decision to delink the yuan and devalue it will increase pressure on commodities imported from there."
Chemical prices are already under pressure and Indian importers are stuck with high-cost commodities, which they are selling at losses, while domestic manufacturers of these commodities are cutting capacity use, with their business becoming unviable.
There are similar fears among importers of steel, who are eagerly awaiting the government to increase import duty further.
Gnanasekar Thiagarajan, research director, Commtrendz, a risk management firm, said: "Even exports of commodities like cotton, textiles, etc, could see an increased competition from Chinese exporters."
The commodity market on Tuesday gave a knee-jerk reaction to China's move. Immediately after the news, the dollar strengthened, and metals, bullion and emerging market currencies started quoting lower.
Ajay Kedia, director, Kedia Commodities, said: “By delinking its currency from the dollar, China has given a signal that it is in trouble and there is a need for measures to lift exports.” So far, China's economy was slowing, but Monday’s trade data showed China’s exports in July this year fell 8.3 per cent from those in the same month a year ago.
China was making efforts with the International Monitory Fund (IMF) to see if it accepts its currency for qualifying for forex reserves. So, the country was keeping its currency stable. However, with IMF delaying a decision on the issue, China had to change its policy on currency to incentivise exports.
The People’s Bank of China’s move led to the yuan’s 1.9 per cent devaluation against the dollar, taking the Chinese currency to its lowest in almost three years. According to Bloomberg, this was the biggest one-day loss since China unified official and market exchange rates in 1994.
Mitul Kotecha, analyst, emerging markets research, Barclays, said in a note that Chinese currency was now on a potentially weaker trajectory. “The (currency) fixing will be more dependent on the market and could move on a more volatile and potentially weaker trajectory than earlier. Asian currencies are set to stay under pressure,” said Kotecha.
However, later in the day, Greece and its creditors agreed on a euro 86-billion bailout deal, which strengthened the euro. So, the dollar index fell to the 97 level, resulting in a strengthening in the prices of gold, crude oil, etc. Gold prices jumped from the level of sub-$1,100 an ounce to $1,110. Crude oil also saw gains but reports of a high inventory and higher Iran output played spoilsport.
Following the China development, copper, nickel and tin dropped at least 2.5 per cent in London. Aluminium slipped two per cent after Goldman Sachs Group Inc cut its price forecast for the white metal.
India’s rupee also declined — to a near-two-month low of 64.21 a dollar, compared with 63.87 on Monday. The currency had ended at 64.25 on June 16.
State Bank of India Chairman Arundhati Bhattacharya said: “Major global currencies are depreciating, but our currency is stable. So, our exports are under a lot of stress. We have asked the regulator to allow foreign-currency loans for exporters, instead of rupee loans, because the value gets eroded if the loan is in the domestic currency.”
“Indian clients who are exporting to developed countries like the US are doing good, as the demand there is increasing. However, those who are exporting goods like cotton yarn and iron ore to China are facing huge challenges," she added. "Banks, the government and regulator have to think in unison as to how we can help the sector so that they manage to keep their heads above the water.”
Suresh Nair, director, Admisi Forex India, said: “Competitive devaluation by China will push countries like India to also devalue, in a bid to remain export-competitive. The government might be comfortable with the rupee being in the range of 64-65 a dollar. The challenge which China faces today is that a lot of its manufacturing activities can move out to other Asian countries. It, therefore, has to maintain its export-competitiveness.”
Religare Securities President Jayant Manglik said: “Following a depreciation of the Chinese currency, the rupee is also likely to depreciate, and the dollar's strengthening on the expected rate increase by the US Federal Reserve will accelerate the process. This should help improve exports. However, this also means costlier imports and inflation.”
The rupee on Tuesday was down 0.5 per cent, but not as much as the devaluation in China’s yuan. A weaker yuan, however, is likely to affect India’s exports, and take away market from domestic producers, with Chinese goods turning cheaper.
According to Reuters, the Chinese central bank described it as a “one-off depreciation”, based on a new way of managing the exchange rate that better reflected market forces, but economists said the timing suggested it was also aimed at helping exporters.
Indian players worried
S C Ralhan, president, Federation of Indian Export Organisations, said: "The devaluation will affect India's exports, not only to China but also to other countries, with increasing competitiveness of Chinese exports. This will also lead to higher imports from China, which has excessive capacity in diverse sectors of manufacturing. We have to keep our trade defence measures ready to address the dumping, if that happens."
Firdose Vandrevala, executive vice-chairman, Essar Steel India, echoed the view. "The devaluation of the Chinese yuan appears to be a step taken to counter a slowdown in their domestic market and to stimulate exports. We have to ensure that India is not the dumping ground, like it became for steel recently. Indian industry suffers from relatively high interest rates and logistics costs compared to international players. The government must ensure fair play domestically and provide global competitiveness support."
Tyre makers are equally worried, given that one in every four tyres sold in India is made by Chinese companies. There are other issues - much bigger ones - that many countries may have to face.
"This (yuan devaluation) might lead to a currency war, as is visible in huge depreciation in several currencies. The huge volatility will increase the hedging cost for Indian exports as well," said Ralhan.
Traders dealing with China fear an increase in dumping of commodities like paper, steel, chemicals and petrochemicals, besides electric goods imported from China, as lower currency incentivises that country's exports.
Janak Ladhani, managing director, Sonkamal Enterprise, an importer of chemicals like phenol, said: "Importers were already facing a huge pressure due to a continued fall in chemicals and petrochemicals after a sharp fall in crude oil prices in the past two months. China's decision to delink the yuan and devalue it will increase pressure on commodities imported from there."
Chemical prices are already under pressure and Indian importers are stuck with high-cost commodities, which they are selling at losses, while domestic manufacturers of these commodities are cutting capacity use, with their business becoming unviable.
There are similar fears among importers of steel, who are eagerly awaiting the government to increase import duty further.
Gnanasekar Thiagarajan, research director, Commtrendz, a risk management firm, said: "Even exports of commodities like cotton, textiles, etc, could see an increased competition from Chinese exporters."
The commodity market on Tuesday gave a knee-jerk reaction to China's move. Immediately after the news, the dollar strengthened, and metals, bullion and emerging market currencies started quoting lower.
Ajay Kedia, director, Kedia Commodities, said: “By delinking its currency from the dollar, China has given a signal that it is in trouble and there is a need for measures to lift exports.” So far, China's economy was slowing, but Monday’s trade data showed China’s exports in July this year fell 8.3 per cent from those in the same month a year ago.
China was making efforts with the International Monitory Fund (IMF) to see if it accepts its currency for qualifying for forex reserves. So, the country was keeping its currency stable. However, with IMF delaying a decision on the issue, China had to change its policy on currency to incentivise exports.