Desperate measures by China to arrest falling exports, ignites the fear of a full-fledged currency war
By Sai Nikesh D
The devaluation of Chinese currency by more than 3% in the past two days has become a major concern for Indian manufacturers and traders who have already been facing tough fight against cheap imports from China.
According to Indian government officials, the fall in Chinese currency value will affect India’s exports. Indian authorities are also concerned about its possible impact on the country’s Foreign Direct Investment (FDI), as China may become an attractive destination for foreign investors.
The International Monetary Fund (IMF), on August 12, 2015, said, “The new mechanism for determining the central parity of the Renminbi announced by the People’s Bank of China (PBC) appears a welcome step, as it should allow market forces to have a greater role in determining the exchange rate.”
The global body also said that the exact impact will depend on how the new mechanism is implemented in practice. After reducing the Yuan value by 1.9% on Tuesday, the Chinese Central Bank announced another cut of 1.6% on Wednesday, triggering a shock wave in the financial markets across the world.
According to the Associated Chamber of Commerce and Industry (ASSOCHAM),the back to back depreciation is the portent full-fledged currency war between competing and powerful economies of the world.
“Ironically, this war would catch emerging economies like India in the middle,” says ASSOCHAM. The industry body said that sharp currency depreciation, the steepest in over two decades, will have a three-fold impact on India.“China’s currency war is not double, but triple whammy for India,” it added.
Apart from making the Indian currency more volatile, the Chinese move can also increase the external risks for India and other emerging economies, said D S Rawat, Secretary General, ASSOCHAM.
Both the RBI and the Finance Ministry should keep a very close watch and take immediate actions to ensure that Indian economy does not suffer the collateral damage of the currency war.
“Indian central bank along with the government and the industry must also make a move that can not only withstand the pressure from China, the US Fed, but take advantage of the fast changing situation,”said the ASSOCHAM.
Experts also believe that if Indian rupee fails to keep pace with yuan in losing value, China will dump goods into the Indian market. “The devaluation will affect India’s exports not only to China, but to other countries also with increasing competitiveness of Chinese exports,” said S C Ralhan, President of the Federation of Indian Export Organisations(FIEO).
This may swell the Indian-China trade deficit further, which is already touching $50 billion, Ralhan said, adding that the huge volatility in currencies will increase the hedging cost for Indian exports also.
Praveen Khandelwal, Secretary General of the Confederation of All India Traders (CAIT), also expressed similar views. “The government should take a strict stance to avoid dumping into the country by taking serious measures like increasing import duties and imposing anti-dumping measuresto protect the domestic industry,” says Khandelwal.
But Anupam Shah, Chairman of the Engineering Export Promotion Council (EEPC), is opposed to raising import duties, especially on steel which is the main raw material for Indian manufacturers.
“The move is ill-advised as it would push up the cost of the manufacturing of the engineering products and make them more uncompetitive,” he said.
However, Shah opined that the fall in Chinese currency will give more competition to Indian exporters in the international market. “In engineering exports, we compete with the Chinese manufacturing industries face to face on a number of value added items. Surely, a lot more troubles lie ahead of us,” he added.
This article was published in The Dollar Business on August 12, 2015