Literature review

1.

The Chinese Devaluation of the Yuan (Matthew Johnston, September 02,

2015)
Just over one week ago the Peoples Bank of China (PBOC) surprised markets

with three consecutive devaluations of the yuan, knocking over 3% off its value. Since 2005,
Chinas currency has appreciated 33% against the US dollar and the first devaluation on August
11 marked the largest single drop in 20 years. While the move was unexpected and believed by
many to be a desperate attempt by China to boost exports in support of an economy that is
growing at its slowest rate in a quarter century, the PBOC claims that the devaluation is all part
of its reforms to move towards a more market-oriented economy. The relative size of the
devaluation appears to be in line with market fundamentals and thus, at least for now, the
PBOCs claims can be believed. After a decade of a steady appreciation against the US dollar,
investors had become accustomed to the stability and growing strength of the yuan. Thus,
while a somewhat insignificant change compared to exchange rates that can sometimes move
double-digit percentages over several days, the more than 3% drop had investors rattled. U.S.
stock markets, including the Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ, as well
as European and Latin American markets fell in response to the devaluation. While some argue
that the move is a sign that Chinas economy is performing worse than expected and the move
is an attempt to make exports more attractive, the PBOC indicated that the devaluation was
motivated by other factors.

2.

South china morning post (Chi Zuange, 23 August, 2015)

Chinas central bank shocked markets on 11th August when it devalued its currency, the

yuan, by lowering its daily mid-point trading price to 1.87 per cent weaker against the US dollar.
A day later, the central bank sent shockwaves again with a second devaluation, pushing down
the price by another 1.62 per cent against the US dollar. Fears have mounted of a regional
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currency war as Chinas moves come on the back of the softening of Japans yen and the Korean
won over the past year. Chinas currency devaluation is seen largely as a bid to boost the
competitiveness of its exports but is not without implications for its ambition to internationalize
the currency and risks triggering capital outflows.

3.

The Hindu (sanjay vijaykuamr, 15 august,2015)

The devaluation of Yuan has put a special focus on the potential of the move eroding

Indias trade competitiveness. Experts differ on the impact with some saying that the
competitiveness factor were beyond currency movements, while others saying that India can
maintain its competitiveness if rupee also declines. India has had a sustained trade deficit with
China, which touched nearly $50 billion in fiscal 2015. The risk for India comes from two ways:
one cheaper import from China affecting domestic companies and second it would affect
Indias exports to other countries. To retain export competitiveness to the extent possible, the
rupee must also decline. It may be pointed out here that since 2013 onwards when the RBI took
corrective measures to steady the rupee, our currency has performed better than those of
other emerging markets. There are definitely signs of competitive depreciation across countries
driven currently by market forces and not governments or central banks, said CARE Ratings
in a note. Brokerages Nomura and DBS Group Research point out that the trade balances
between India and China are beyond just currency movements. Both of them pointed that
there has been increased imports from China despite a significant appreciation of the Yuan
versus the rupee. They pointed out that India should focus on policy related efforts in boosting
competitiveness.

Research Methodology
Research Problem statement:
To study the effect of devaluation of Yuan on Indian rupee.
Research Objective:
1. To know the effect of Yuan devaluation on Indias export and import with china.
Variables:
1.
2.
3.
4.

Currencies [ Indian rupee, Yuan, US dollar]

Interest rate
Foreign countries trading with India and china
Investment in Indian stock market

Research Design:
Research type: Exploratory research
Type of data collection: secondary data
Method of data Collection:
Articles in different newspapers
Websites
Benefits of study:
This study will help to know the effect of direct and indirect impact of devaluation of
Yuan on overall Indian economy.
Limitations of the study:
1) Other variables like federal interest rate, effect of devaluation on American export,
import to India, Gold price fluctuation has been overlooked.
2) Effect on particular sector of economy both China and India.
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Analysis
Impact on export
The Chinese take their numbers very seriously. Whether it is the size of their economy, its
galloping pace, or the quantum of dollars held as reserves, these figures seem to dominate
their policymaking. Failing that, it is difficult to discern why they would go so far as devaluing
the Chinese yuan.
A look at the graph below gives you the primary reason for the Chinese yuan devaluation
falling exports.

While exports rose month-over-month in July 2015, exports were actually down 8.3% yearover-year. The nations exports had fallen 15.0% year-over-year in March 2015, 6.4% in April,
and 2.5% in May before rising by 2.8% in June. This is a significant depreciation for any nation
and more so for an export-intensive nation like China. When you match this depreciation with
the significant appreciation in Chinese equities until mid-June (FXI) (MCHI), the picture looks
distorted. Yes, much of the correction in the Chinese stock market had to do with domestic
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investors betting on emotion rather than reason. However, economic fundamentals are not a
far-fetched explanation either.

Chinese yuan devaluation

In a situation when buyers are unwilling to spend, a seller can make a deal more
attractive by lowering the price of the goods or service. Nations do this by creating conditions
that will make the domestic currency lose its value, making their goods cheaper in the
international market. The value of the Chinese yuan is not free-floating like the US dollar, for
example. The Peoples Bank of China determines the rate of the unit every day. The Chinese
central bank let the yuan depreciate for three straight days last weeknot a normal
occurrence.

Impact on Indian Rupee:Examining the direct impact of Chinese currency movements on the Indian economy
and stock markets there are several strains immediately visible. A cheaper Yuan makes it even
more difficult for Indian exports to compete with Chinese exports as in textiles and apparels.
Slowing Chinese economy also means lower commodity prices globally which hurts Indian
commodity producers though helps the overall inflation levels to come down. Though the S&P
BSE SENSEX has remained relatively flat in the last three months, it succumbed to global fears
over the weekend with the SENSEX down 8.5% accompanied by an accompanying sharp fall in
the INR. The real impact can be witnessed in the USD version of the SENSEX. The S&P BSE
Dollex 30 has fallen 11.9% in the wake of the RS.3 depreciation brought on by the stronger
dollar. A weaker rupee reduces the amount FIIs reap on stock market returns giving them less
reason to bring in inflows to the Indian market. Global stock market volatility is expected to
remain given the weak Chinese economy and the expectation of an interest rate rise in the US.
Indias Reserve bank Governor has assured that they are well prepared to defend the rupee
against a further fall with USD 354 billion chest and it is to be noted that the Rupee has not yet
slid to its previous low of Rs. 68.80. Consumer price inflation is also under control at least in
the immediate term though it remains to be seen if it can be sustained. No doubt falling
commodity prices will help contain inflation.
Comparing Indian stock markets to other major emerging markets, the picture is much better.
Looking at chart 3, we see that the Indian Rupee has been holding up better against the US
dollar and its stock market performance has also been more stable. The Indian authorities have
rushed in to calm fears. While the short term may remain volatile given global fears, in the long
term the stronger fundamentals should help the Indian market.

Impact on Indian trade

From Chinas perspective, India is not a very big trading partner of China. However, its
importance as a significant trading partner for China is growing.
Chinas exports to India formed 2.3% of its overall exports in 2014. This share is higher than that
of Taiwan, Singapore, and Malaysia. From January to July 2015, Chinese exports to India have
risen 9.7% from the same period in 2014. During the same period, imports from India have
fallen a sharp 23.1%. This helped China boost its trade surplus with India by 27.1% from the
same period a year ago.

Market reaction
If the India ETF (INDA) is compared with MSCI China ETF (MCHI). Both invest in largeand mid-cap companies and give access to 85% of the stock market of their respective
geographies. Stocks of companies like Infosys (INFY), Dr. Reddys Laboratories (RDY), ICICI Bank
(IBN), and Tata Motors (TTM) comprise 16.3% of INDAs portfolio. Indian equities have not
fared well in year-to-date 2015. Although Indian stocks did not fall as much when Chinese
equities had corrected in late June and July, their reaction to the yuan devaluation was
noticeably sharp.
Under the Make in India campaign, India is aiming to become a major manufacturing
hub, apart from supporting the flagging domestic manufacturing sector. Competition with
China was already tough, but with yuan devaluation expected to make Chinese goods cheaper,
Indian manufacturers will have a much tougher time in supporting Indias export figure. The
textile and chemicals sectors can come under tremendous pressure due to this competition.

Impact on other countries Trade

From the trade figures that examined in this analysis, one thing is clearChina has been
sharply cutting down on imports in order to prop up its economic growth. It also demonstrates
that the Yuans devaluation was a drastic measure that China had to undertake when Julys
trade figures surprised on the downside. However, in US dollar terms, exports rose from June
and their value was sharply down from a year ago.
A sharp reduction in imports by China is negative for economies like South Korea, Malaysia, and
Taiwan, all of whose economic growth is expected to falter in 2015.

Investments
A look at the graph above gives you an overall picture of how the equities of seven major Asian
trading partners reacted to the correction in Chinese stocks and later, the yuan devaluation.
A sharp correction in Chinese stocks (MCHI) (FXI) such as Weibo Corporation (WB), NetEase
(NTES), and Qihoo 360 Technology Co. (QIHU) elicited a sharp response from stock markets in
Hong Kong, Taiwan, and South Korea, although to different degrees. However, the stocks of
some Asian trading partners were relatively insulated

Findings
1) Chinas Yuan devaluation affects the overall performance of all trading partners country
market performance, Trade deficit and growth.
2) As compared to other country the effect is much early digested by the Indian market as
there is more growth perspective in Indian market (S&P expected growth for Indian in
2015-2016 is 7.5%).

3) Due to devaluation of yuan, china get export advantage of 4% within a week of

devaluation.
4) The main effect of devaluation is seen on the textile, Rubber and cement manufacturing
companies as Indian and china both are exporting the major proportion of those good
to rest of the world.

5) The main reason behind the sluggish economic conduction behind the china economy is
margin trading, umbrella shade and poor manufacturing and infrastructure return

Bibliography:1) http://marketrealist.com/2015/08/yuans-devaluation-chinas-asian-trading-partners/
2) http://swarajyamag.com/economy/how-the-chinese-yuan-devaluation-will-affect-india/

3) https://www.indexologyblog.com/2015/08/26/chinas-currency-devaluation-and-itsimpact-on-the-indian-stock-markets/
4) https://www.quora.com/How-will-the-devaluation-of-the-yuan-affect-India

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