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Please find below a news article on China’s Yuan Devaluation as appeared in Live Mint for your reading:

China devalues yuan, rattles global markets

Cheaper Chinese imports may hurt Indian firms; relative strength of rupee could crimp exports

Mumbai: China’s decision to devalue the yuan caused ripples across Asia, with markets adjusting to a weaker Chinese currency and policymakers and corporate executives fearing a surge in cheap imports from the country.

On Tuesday, the People’s Bank of China (PBoC) cut its daily reference rate for the yuan by 1.9%, signalling that it wanted a weaker currency at a time when growth in the country’s economy is slowing and exports are falling.

Over the weekend, China reported an 8.3% contraction in exports in July, adding to worries surrounding Asia’s largest economy, which is growing at the slowest rate since 2009.

Against that backdrop, the PBoC, China’s central bank, explained the decision to repeg the currency lower against the dollar as a “one-time correction”.

“As China is maintaining a relatively large trade surplus, RMB’s real effective exchange rate is relatively strong, which is not entirely consistent with market expectation. Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development,” PBoC said in a post on its website. RMB is short for renminbi, of which the yuan is the primary unit.

In response, most Asian currencies adjusted lower against the US dollar. The Bloomberg JPMorgan Asia Dollar Index, an index which measures the dollar against a basket of Asian currencies, slipped 1.66% to 108.39.

Apart from the yuan (which weakened 1.8% in the spot market), the steepest weakness was seen in the Singapore dollar (down 1.3%), the Korean won (down 1.3%) and the Malaysian ringgit (down 0.9%). The rupee slipped 0.5% to close at 64.21 against the dollar.

The markets are watching to see if this is really a one-off move or whether there will be more volatile movements in the yuan, said Ananth Narayan, regional head of global markets, South Asia, at Standard Chartered Bank.

“It’s a strong term but this could be the start of a currency war as China is the largest trading partner for a number of countries, who will now be under pressure to maintain competitiveness,” said Narayan.

Other currency market analysts agreed.

In a research note on TuesdayJPMorgan analysts wrote that other Asian countries would see this as competitive devaluation from China, adding that currencies like the Korean won, the Taiwanese dollar and the Singapore dollar may be most vulnerable.

That won’t end well for anyone, predicted an analyst.

“With Chinese devaluation, currency war is in full force with almost every major currency in the world following loose monetary policy and competitive devaluation to revive growth. Instead of focusing on productivity-led growth, a focus on monetary policy-based growth will eventually create significant pain,” added Samir Lodha, managing director at QuantArt Market Solutions Pvt. Ltd.

India, in particular, may be under pressure. The rupee has been among the best performing currencies globally in recent months as a steady inflow of foreign capital and a lower current account deficit bolstered it.

Since 2014, the rupee has depreciated just 3.8% in response to a 21.5% gain in the dollar index, leaving the Indian currency overvalued.

“The rupee is considerably overvalued by 11-12% in real effective exchange rate terms. We are increasingly losing competitiveness and our exports are down. We could do with some depreciation towards 65-66/$ levels but it’s tough to see where that will come from,” said Narayan.

The strength in the currency, along with a sluggish global economy, are being seen as key reasons behind the weakness in India’s exports. Merchandise exports fell 15.8% in June, the seventh consecutive month of contraction.

Representatives of the export sector fear this will only get worse.

“Tough times (lie) ahead for Indian exporters and local producers as Chinese imports may flood the domestic market. For Indian exporters, it will become further difficult to enter Chinese market. The landed cost for Chinese market will go up, making exports to that country expensive,” said Ajay Sahai, director general and chief executive officer at Federation of Indian Export Organisations.

Sahai added that it will be tougher for Indian manufacturers to fend off competition from Chinese firms in other export markets as well.

“India is closely watching the situation and will take appropriate measures at the right time,” finance ministry spokesman D.S. Malik told Bloomberg on Tuesday.

The more immediate pain, though, may be felt by Indian companies making steel, capital goods and tyres.

Many of these sectors have been under pressure due to a surge in imports, which could spike further as a weaker Chinese currency would widen the price differential between imports and domestically manufactured goods.

Imports from China jumped by one-fifth to $60 billion in FY15, compared with a year ago, while exports plunged to $12 billion, according to a note by Kotak Institutional Research on 10 June.

“The competitive devaluation of the yuan is to boost their exports. With this China will have an advantage in pricing,” said Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel Ltd, adding that Chinese steel manufacturers also have other advantages such as tax rebates given to them.

All taken together, steel imports from China cost almost 40% lower than local steel, said Rao.

In 2014-2015, China exported 3.6 million tonnes of finished steel to India—a jump of 232%. This forced Indian manufacturers to reduce prices even at the cost of margins.

A similar story has played out in tyres, where imports of truck and bus radial tyres from China rose 181% in 2014-15, according to data from the Automotive Tyre Manufacturers’ Association (ATMA).

The imports have hurt capacity utilization of the tyre industry, which has dropped to 60-65% from 90-95% three years ago, said Rajiv Budhraja, director general at ATMA.

The capital goods sector may also lose out to Chinese equipment, particularly as order flow picks up across the sector.

“In the last one year, there have been sizeable order conclusions in the transmission and distribution sector and Chinese manufacturers have taken orders. The current devaluation of Chinese currency will certainly impact the prospects of Indian capital goods companies, not only in the Indian market, but also in the international market place,” said M.S. Unnikrishnan, managing director and CEO at Thermax Ltd.


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