Will China’s renminbi devaluation be disruptive for EMs like India?

The renminbi is hovering at a four-and-a-half-year low, down over 4% against the dollar since the beginning of the year as China is trying to give markets more say in determining its exchange rate, although some believe it indicates a slow and steady depreciation in a move to stimulate growth by boosting exports.

The yuan is depreciating at a time when the dollar is strengthening. The US Federal Reserve has raised interest rates from a record low for the first time in a decade. Since China is re-balancing, its economy from investment to consumption-led growth and it is finding it difficult to spur consumption, renminbi devaluation may very well continue going into 2016.

Will China’s currency devaluation be disruptive for emerging markets (EMs) like India?

The weakening of the yuan could lead to competitive devaluation of Asian and EM currencies. It already seems to be happening, according to Madan Sabnavis, chief economist at CARE Ratings. While the dollar is rising against a basket of currencies, EM currencies such as Indonesia’s rupiah, Turkish lira, and Thai baht have fallen 9% to 20% year-to-date, much more than the renminbi.

India’s exports have plunged for 12 consecutive months, down 17.6% year-to-date because of anaemic growth in developed and Asian economies. A competitive devaluation of Asian and EM currencies could further hurt India’s export growth as rupee has not fallen much (down 5%) compared with other EMs, said Sabnavis.

The other worry for India is imports. Around 12% of India’s imports come from China as of 2015. Of the major import items—electrical and electronics such as mobile phones, computers, machinery, organic chemicals, fertilizers and iron and steel come from China. Any increase in Chinese competitiveness including through the yuan depreciation could lead to a surge in such imports, points out Sujan Hajra, chief economist at Anand Rathi Securities Ltd.

There are also a large number of other import items such as furniture, textiles, apparel, footwear, fabrics, ceramics, glassware and vehicles, where China commands a large share of India’s imports. Apart from replacing imports from other trade partners of India (and thereby further increasing the imbalance of Sino-Indian bilateral trade), the surge in such imports could impact these industries in India, according to an Anand Rathi note dated 2 November.

The renminbi appreciated by nearly 50% against the rupee during 2007-14, but the imports to India only increased. This indicates that India does not have a manufacturing base to counter Chinese imports. Also, China may be sending or dumping goods to India at prices lower than in its domestic market, according to Hajra.

Of course, there is some solace as the government has imposed a 20% safeguard duty on steel imports to curb the rise in cheaper imports. And an early implementation of the Make in India programme could help counter cheap imports and boost exports.