Home >Companies >Nobody is going to let the Chinese economy slide

Having natural hedging in place is key
R. Rajendran, director (finance), Lakshmi Machine Works

R. Rajendran does not read much into the currency devaluation in China. “The current devaluation, in case of Chinese yuan, is only a structural adjustment which was overdue," he says.

Devaluation of any currency, Rajendran says, will have a temporary impact. “Steep devaluation of any currency will temporarily boost the exports and imports become expensive," he says.

But to have a natural hedging in place is key, says Rajendran. “A balanced exposure to both imports and exports provides as a natural hedging," he adds. This way companies are protected from exchange fluctuation.

Though Rajendran expects a temporary impact, the long term, he says, may not be a huge concern. “Marginal devaluation of Chinese yuan, as in the instant case, will not affect very much in the long run for the Indian companies who are dealing with China," he notes. Lakshmi Machine Works exports textile machinery equipment to geographies like China.

Rajendran says the strategy should be to continue to supply to established markets, even in the wake of currency devaluation. “It will be beneficial in the long run as most of the trade is happening in dollar or euro and other currencies are linked to yuan," he adds.

Share in any market is vital for sustenance, says Rajendran. On anticipating such currency movements, he says, “Currency depreciation happens on account of various factors, GDP (gross domestic product), balance of payments and external trade. However, transactions, which have happened over a period time, will to some extent help disclose the health of a particular currency."

—Amritha Pillay

Need to diversify, spur local demand
Harish H.V., partner, Grant Thornton India

The Chinese yuan’s devaluation has come as a surprise, though there was some action expected, says Harish H.V. “It is a clear sign of deterioration in the Chinese economy and China is taking steps to drive the one big strength of its economy, which is exports," he says.

The impact of the latest action of the Chinese could be overall positive for Indian exporters in my opinion, says Harish.

“There will be a dip in commodity prices with possible weakening of Chinese demand, delays in Fed and Western world’s proposed interest rate increase (which means reduced risk of money flowing out of emerging markets), RBI possibly reducing interest rates using this event as a trigger, and continued weakening of the rupee," he notes.

“Since we also import large volumes of Chinese products, these would become cheaper," adds Harish. Indian exports to China include raw material such as ore, slag, iron and steel, textiles, plastics, organic chemicals, and cotton.

“Companies in these sectors need to be watchful of the overall signals emanating from the Chinese economy, which seem to indicate that a bubble effect exists there on asset prices and any deflation of this bubble would result in erosion of wealth, and hence weak demand for products or pricing pressures for products sold to China," he says.

Given this, exporters to China need to start planning to diversify their markets beyond China into other countries and also look to stimulate demand within India.

Another important area to consider is the currency risk. “Indian companies need to price their exports in hard currencies such as US dollar or even in rupees than Chinese yuan, and then hedge their currency exposures," says Harish.

Third, and this applies to all exporters, be more dynamic in your strategy and nimble to shift production, markets, pricing, etc. and align your infrastructure to be as asset light as possible and focus on building a culture of dynamism, he adds.

—Swaraj Singh Dhanjal

Great fillip for Indian manufacturing
P.D. Jose, associate professor (corporate strategy and policy), Indian Institute of Management Bangalore

While Indian exporters who sell to China may be shaking in their shoes, this would be the perfect opportunity for other businesses to prosper, says P.D. Jose.

According to him, companies which sell finished products to other parts of the world should take this as an opportunity, as a Chinese slowdown would work as a great fillip for Indian manufacturing.

“In case of Indian companies that deal with selling finished products to the rest of the world, a slowdown in the Chinese markets would be of a lot of benefit, because global buyers may choose India as a good alternative," says Jose.

However, he warns that if the Chinese government were to choose to devalue the local currency further—something that the government has done many times before—India tends to lose its edge immediately. Hence the next phase of growth should be a well-calculated one.

“Also, the Chinese economic policies have always been a little opaque, which means that nobody really knows the level of decay or whether this would actually last very long. Personally speaking, the Chinese have huge economic strength and their ability to bounce back from a prospective slowdown cannot be suspected," he says.

In case of exporters, the best way to deal with this would be to find a new buyer elsewhere in the world, says Jose. Diversification will help a lot in dealing with economic stress in one part of the world.

“All said and done, you may not like the Chinese, but the economy is well connected with all major economies in the world. This means that any kind of slowdown or weakness there, will affect everyone in the world," he says.

Thus when doomsayers say that this is the beginning of the end, we should take it with a pinch of salt, Jose says he believes. “For their own benefit, nobody is going to let the Chinese economy slide," he adds.

—Vishwanath Nair

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