Tuesday July 16, 2019
Home Business The Yuan effe...

The Yuan effect: Pursuing economic reform or global leadership ambition?

0
//

By Gaurav Sharma

On Wednesday, Yuan–the Chinese currency fell to a four year low, sparking global panic in the financial markets. World currencies including the Indonesian rupiah, Singapore dollar, Taiwan dollar, Philippine peso and the Indian rupee declined under the cascading effect of the fall in Yuan.

eb72589cb1d616fcdeaadd9f694c33e0
www.hkchcc.org

The devaluation of the Yuan was part of China’s response to its tepid growth rate and slowing exports and was favored by the International Monetary Fund (IMF) as a “welcome move”. Meanwhile, the Indian markets, like its international counterparts tumbled down sharply in the aftermath. The BSE Sensex, the Indian benchmark index plunged 354 points to close at 27,512, its lowest point in two weeks. The rupee shed 59 points to nearly touch its two-year low of 64.78.

In contrast to IMF’s findings, the devaluation has raised concerns over a brewing global currency war, with accusations being hurled at China for “unfairly” supporting its exporters.

The valuation of currency is determined vis-a-vis the US dollar and all emerging market currencies have nosedived against the global currency standard.

“The rupee is facing competitive devaluation pressure due to devaluation of Chinese Yuan. At a time when the Asian and other global majors are depreciating their currencies to safeguard the export market and the economy, India, with a strong currency is at an economic disadvantage”, says Anindya Banerjee, Vice-President at Kotak Securities.

China is India’s largest trading partner and accounts for a huge chunk of its trade deficit ($48.5 billion). As such price fluctuations in currency rates do not have a direct bearing on the exports, but the loss in competitiveness along with the surge in hedging costs definitely dents overall export scenario.

China contends that the devaluation is only a one-time affair intended to make yuan more responsive to market forces. However, most market players are apprehensive as to the Chinese claims. Exporters fear more measures might be under the works.

According to Ajay Sahai, director general of Federation of Indian Export Organizations (FIEO) estimates that each percentage fall in the rupee negatively impacts exports by 0.3 per cent.

However, economists believe that there has been little or no co-relation between export growth and rupee depreciation. Global demand is thought to be a more credible factor in driving export growth while currency movement plays only a small part.

“The exports have lost competitive edge due to non-price factors such as competitiveness, logistics and infrastructure”, says DK Joshi, chief economist at Crisil.

Still other feels that the decision has more to do with the recent crash in Chinese stock markets, which had sparked suspicions on its fundamental resilience. Some believe that the liberalization of the Chinese currency is in line with its long-term plan to cement its place as the global reserve currency, either with the US dollar or as its replacement.

However, as per official data from the Bank for International Settlements suggest that the Yuan was indeed overvalued. Last year in June, it was up 14 per cent. A year earlier, the figure was up by 20 per cent.

In light of the weakness witnessed by China in the past few weeks, it is but natural for China to take corrective measures. The long-term implications of the steps are also clear, to give Yuan a global face-lift. A bold move indeed by Beijing.

Next Story

Talks With IMF To Lower Natural Gas Price, The New President in Ukraine Takes Charge

The government raised gas prices by nearly a quarter in October, allowing it to secure a new $3.9 billion stand-by aid agreement with the IMF.

0
Ukrainian President-elect Volodymyr Zelens
Ukrainian President-elect Volodymyr Zelens. RFERL

Ukrainian President-elect Volodymyr Zelenskiy has called on the country’s government and the state energy firm Naftogaz Ukrainy to hold talks with the International Monetary Fund (IMF) in order to lower the household price for natural gas from May 1.

The IMF, which is helping Ukraine with a multibillion-dollar loan program, has said it wants to see Ukraine set natural gas prices at their market level.

But Zelenskiy, who has yet to take office but won a landslide election victory on April 21, said in a statement on April 24 that he wants prices to be lower.

“Let’s not just in words, but in deeds show that we can take decisions in people’s interests,” the statement on the Zelenskiy team’s Facebook page said.

“For the past four months, gas prices in Europe have been decreasing and now the price of gas for the population in Ukraine is higher than the price of gas on the European market,” it said.

facebook
“Let’s not just in words, but in deeds show that we can take decisions in people’s interests,” the statement on the Zelenskiy team’s Facebook page said. Pixabay

The statement warned that neighboring Russia could limit energy supplies to Ukraine from June 1, and that Moscow may take steps to halt gas transit through Ukraine altogether at the start of 2020 — a move it said would result in significant financial losses and gas supply risks.

“These challenges require us to take effective and fast action,” the statement said.

An IMF spokesman was not immediately available to comment.

money
The IMF, which is helping Ukraine with a multibillion-dollar loan program, has said it wants to see Ukraine set natural gas prices at their market level. Pixabay

Prime Minister Volodymyr Hroysman said in March that he would urge Ukraine’s Finance Ministry and Naftogaz to start talks with the IMF to try to prevent any future rise in gas tariffs.

Also Read: Contemporary Office Ideas to Attract the Best Employees

The government raised gas prices by nearly a quarter in October, allowing it to secure a new $3.9 billion stand-by aid agreement with the IMF.

Gas prices were due to rise by 15 percent again from May 1. But earlier this week the government and Naftogaz agreed to a slight decrease in tariffs. (RFERL)