Ind-Ra: Yuan Devaluation May Threaten the Pace of India's Exports

The Chinese economy which has high trade linkages to growth, in a surprise move devalued its currency leading to a further widening of trade competitiveness for Indian exporters says India Ratings and Research (Ind-Ra). India's exports which have contracted for seven straight months until June 2015 are likely to come under further pressure from Chinese exports. However, the near 2% devaluation of the Yuan alone is unlikely to help Chinese exporters faced with rising surplus capacity and moderating global demand. Although the People's Bank of China has stated that this is a one-off move, however, history shows that currency devaluations are followed by a series of such moves.

While China is battling with falling exports, globally exports have also been sliding. Global exports contracted in nine out of the 10 months until May 2015, and fell 6% on average during these 10 months. This decline in global demand is putting pressure on the export-driven Chinese economy. China is the world's largest exporter and its exports formed 13.7% of the global exports and close to one and half times United States' exports last year. India's exports are a mere 1.9% of total world exports and close to 14% of China's exports. Trade linkage to growth in China is high and hence it is facing the heat of falling global demand.

With global demand contracting, emerging markets are looking to grab pieces of the shrinking global trade pie. India's key items of exports are petroleum products, gems and jewellery, chemicals and textiles. Key markets for Indian exporters are EU, USA, UAE, Hongkong and China. The top Chinese exports include clothing, gems and jewellery, base metals and machinery which are some of the key items that India also exports. Key markets for Chinese exports are EU, USA, Hong Kong, Japan and South Korea. The large overlap in markets and also products highlights the threat Indian exporters face from China.

China is also among the top five countries for Indian exports and India's exports to china declined 19.5% yoy to USD11.9bn in FY15. Items whose exports were over USD1bn included cotton, copper and its articles, mineral fuels and oils and organic chemicals. Chinese demand for Indian goods is likely to contract further due to the decline in the overall demand in the world's second-largest economy.

Indian corporates have been setting up shop in China to explore growth opportunities and 36 Indian companies have subsidiaries or representative offices for doing business in various provinces of China, mainly Beijing, Shanghai and Guangzhou. Among the large corporates are Reliance, Tata, Infosys, Satyam, Lupin, Ranbaxy, Aurobindo, Raymond, SBI, Essel Packaging, Jindal Strips. While the threat to these companies isn't apparent, the overall slowdown is likely to take a toll on companies which have links to the Chinese economy.

Exports of emerging markets, including India and China, have been hurt by the cyclical growth slowdown in the world economy, the strengthening dollar and a slump in commodity prices. A weaker yuan may encourage other central banks in the region to devalue their currencies to stay competitive. Ind-Ra believes that the devaluation of the Chinese yuan will help increase the competitiveness of Chinese exports, however a further decline in the currency may make it difficult for India to maintain its pace of monthly exports at USD22bn.

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