WHAT'S BEHIND CHINA'S CURRENCY DEVALUATION?

Presenters: Poonam, Imran & Azhar.

Our work is about to describe the Chinese Currency Devaluation: We divide the text in four parts:•First part is an introduction: we’ll talk about Chinese Economy & its structure, •In the second part we will discuss Chinese currency & its role in world economy,•In the third part we discuss Chinese currency Devaluation & it’s impact on India,•In the last part we’ll see what’s Actual Scenario of Chinese currency devaluation.

Chinese Economy:

Since 20 years the Chinese economy has a very important role in the international scene, and also continues to be subject of contrasting reviews.

The importance of China in the XXI century is reflected in its role as second largest economy to GDP after United States.

China is also member of the many important institutions: United Nations, WTO, APEC,ASEAN &G20

The Economic Reform:• With the introduction of economic reform based on capitalism, in

1978 China became the country with the fastest economic development in the world: is the second largest exporter and third largest importer of goods.

• There were reforms in industry and agriculture

• Also there were important and decisive initiatives to encourage foreign investment: opening up to foreign countries and the introduction of the free market is so central to the reform.

• The reforms implemented have led to a "socialist market economy",

An Incredible Growth: Over the last 20 years China has got an extremely high savings

rate, averaging around 40 %, Chinese economy has enjoyed one of the highest growth rates in the world.

At the beginning of the nineties there was an incredible increase in GDP, from 4% in 1990 to 10.6% in 2010.

In the ranking of GDP, in 2010 China surpassed Japan and reached at third place

In 2014, China scored a gross domestic product amounted to 10,360,10 Million dollars, while the U.S. is at 17,419,000 Million dollars(As per World Bank), of course the gap is still very large.

Economical Structure:

• Agriculture(13 %)

• Industrial(46.8%)

• Service(40.2%)% of

GDP

Evolution of Chinese Currency: Yuán literally means a "round object" or "round coin".

Issued in 1948

A new yuan was introduced in 1955 , known as the Renminbi yuan. It is the currency of the People's Republic of China to this day.

The currency of China is Renminbi and its unit is Yuan

Fixed to the rate of 2.56 RMB per 100 cents; dollar.

1 Chinese Yuan equals = 10.34 Indian Rupee 1 Chinese Yuan equals = 6.37 USD (as on 09/20/2015)

China’s FX : On 11 August Peoples Bank of China(PBC ) announced changes to

daily fixing arrangement of yuan, in practical terms new policy represents further liberalization of FX regimes.

Under the previous policy regimes yuan was more tightly controlled render it one of the least volatile major currency globally

Under the most recent framework PBC would set daily reference rate each morning, permitted to trade each day within a +/- 2 % band.

The reference rate is now set at the previous days closing prices, while the trading band remains unchanged at +/- 2 % .

The new arrangements led initially to 1.9 % fall in Yuan

Why China devalued the YUAN ?

To boost consumption and rebalance growth engines from exports and investment

Inclusion in the Special Drawing Rights (SDR) basket.

Internationalising the Renminbi

While currency and equity markets are likely to remain volatile for some time, and policy intentions remain ambiguous, it might be a useful to look at impact channels of both a slowdown in China and the policy responses.

IMPACT ON WORLD

• China’s role in the global economy has increased rapidly and disproportionately in trade.

• Its share of world gross domestic product was over 10% in 2014.

• In exports, its share is over 15% and in imports—although a bit lower than in 2014—is over 11%.

• China accounts for close to half of the global consumption of copper, aluminium and steel, and more than 10% of crude oil.

YUAN IMPACT ON INDIAN ECONOMY

The first, and an overwhelmingly positive, impact therefore of a slowdown in China’s commodities demand on India is through lower commodity prices.

However, there is a flip side to falling commodities prices—the effects on companies in India operating in the minerals space, including steel, mining, selected chemicals, and some trading companies.

Many large companies in the production space are quite leveraged, with debt-funded production capacities built up in the high-growth years.

Stress on debt servicing ability is already high, and a further drop in commodities prices and a slowdown in exports will add to this.

Indian manufacturers have already complained of non-market prices—maybe even dumping below cost—of China’s exports to India, and a further drop in China’s capacity utilisation in segments like iron and steel, bulk drugs and chemicals will lead to a further drop in prices.

Besides imports, India’s exporters will also lose out on currency competitiveness to China in segments it competes directly with China—particularly textiles and apparels—as well as chemicals and project exports.

India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20% in 2009-10 to 35% in 2014-15.

Five Indian sectors that will be impacted by China's yuan devaluation:

Textiles

Chemicals

Metals

Consumables

E-commerce 

1) Rupee volatility 2) Pressure on exports 3) Dumping of Chinese goods

What Dragon is Showing to World

#1 What did China do?#2 Why did China do it?#3 What does this mean for the rest of the world?#4 What does this mean for markets?#5 What’s next?

Thank You !!!