Dr. Ashwani Mahajan
Recent devaluation of Yuan by Chinese authorities by more than 4.4 percent has jolted the stock markets globally and share prices have sharply declined world over. Many of the emerging economies also had to depreciate their currencies, to nullify the effect of Yuan’s devaluation. If history is any guide, this competitive devaluation benefits none and this kind of policies had actually ruined the economies world over during great depression of 1930s. According to economic theory if all countries depreciate their respective currencies, then no country will gain; rather the impact of upheavals resulting from the same may cost global financial system heavily.
Why Yuan had to be Depreciated
Chinese economy has been passing through a difficult phase for the past few years. It is known to all, that Chinese economy had been growing at a fast pace and growth rate exceeded 15 percent annually, on many occasions.
China started manufacturing and exporting goods ranging from mobile phones and other telecom equipment, toys, electrical goods, consumer electronic and small & big machines. Chinese goods started flooding US, European and Indian markets and also many others. Not only Chinese, even foreign companies (including MNCs) started establishing new production units in China. May Indian industrialists established their production base in China; and China became ‘manufacturing hub’ of the world.
In the last two years China has been going through major crisis. First element of crisis is high rate of inflation. This inflation caused wage rates to go up. Wages of ordinary workers increased from 960 Yuan per month in 2010 to 1820 Yuan by June 2015. Secondly, in earlier years, provincial Governments and Central Government of China used to heavily subsidize exports; however in later years high quantum of fiscal deficit compelled them to cut down these subsidies. It is notable that internal debt of China, which was 125 percent of GDP in 2008, peaked to 207 percent of GDP by June 2015 (Source: Bloomberg Business). Thus cheapening of Chinese products by subsidization was not a plausible proportion for Chinese Government anymore; as a result of which China started losing its competitive edge in global markets. Thirdly, ongoing recession in US and European economies also led to decline in Chinese exports. On the other hand other emerging economies started registering their presence by proving their competitive edge over China. Fourth major reason for slow down in China was reduction of investment in their infrastructure projects. China had invested heavily in infrastructure (like rail, road, electricity etc.) in the last more than two decades. However, now its pace has slowed down, resulting in decline in Chinese growth.
After growing at a much faster rate in the last more than two decades, China is not able to digest this slowdown. Share markets have started sliding down and in the last few months, stock markets have eroded by more than 40 percent in China. Investors, who were loving to invest in China, have actually started exiting. Foreign exchange reserves of China have started depleting and China’s foreign exchange reserves, the world’s largest, started falling from a record $3.99 trillion in June 2014 due to a wave of capital outflows caused by its economic slowdown and expected hike in interest rate by Federal Reserve. Foreign exchange reserves fell by record $42.5 billion in July to $3.65 trillion. In order to promote exports and to discourage foreign investors from exiting China, Chinese Government decided to devalue Yuan and it depreciated Yuan by nearly 2 percent on August 10, 2015. This process continued and by now Yuan has depreciated by more than 4.4 percent.
Impact on India
As a result of this sudden development in China; Mumbai Stock Exchange’s sensitive index, ‘Sensex’, dipped by 1624 point on August 24, 2015. This was highest single day downfall historically. Rupee also declined and bottomed at near rupees 67 per US$. Generally speaking, such kind of situation would be treated as danger bell for the economy. However, in Indian context there is no need to panic or to get influenced by current global situation. We must understand that ‘Sensex’ is no barometer to gauge economy’s health.
Short Term Impact
If we see different other indicators, India’s economy looks much stronger. Oil and gold prices continue to lie low. Inflation, both wholesale and retail is under control. Most important aspect is that with political stability, mood of the people is also upbeat. There are no big Chinese investments in Indian stock markets and therefore Indian economy is likely to remain insulated from Chinese upheavals. We cannot equate present Chinese crisis with US’s meltdown. It is notable that Indian economy got a jolt from US economy’s meltdown.
Chinese Crisis : Opportunity for India
China adopted export led model of development based on mass production. They could easily use India and other parts of the world as their markets. Slowdown in China can help Indian industry to re-capture domestic market, which at present is flooded with Chinese products. Promise of the present government to boost manufacturing and its ‘make in India’ campaign is also in tune with the same. Government has also resolved to give favourable atmosphere to the investment. Whereas, we have been successful to send our spacecraft to the Mars and that too at much lower cost; we build not only long range missiles, Param Computer and even atom bomb, nothing can stop us to develop our manufacturing base. Chinese crisis is giving us an opportunity to build and strengthen our industrial base and substitute Chinese mobile phones, telecom products, computers, electronics and other products, by domestically produced goods. We need to grab the same.
( The author is a associate Professor, PGDAV College, University of Delhi)
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