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Market Monitor | September 2015

Yuan devaluation to hit textile industry

The devaluation of Chinese currency yuan will have an adverse impact on India´s textiles exports and clothing, which is facing sluggish growth due to recessionary conditions in global markets. The surprise move by China to devalue its currency is a threat to the pace of India´s exports, according to analysts. Indian exports have already been under pressure and the devaluation of the Chinese yuan is ¨leading to a further widening of trade competitiveness for Indian exporters¨, said Devendra Kumar Pant, the chief economist at India Ratings and Research, which is part of Fitch Group. ¨India´s key items of exports are petroleum products, gems and jewellery, chemicals and textiles,¨ he said. ¨Key markets for Indian exporters are EU, US, UAE, Hong Kong and China. Top Chinese exports include clothing, gems and jewellery, base metals and machinery which are some of the key items that India also exports. The high overlap in markets and also products highlights the threat Indian exporters face from China.¨ Exports of emerging markets, including India and China, have been hit by a slowdown in the global economy. China is the world´s biggest exporter.

¨A weaker yuan may encourage other central banks in the region to devalue their currencies to stay competitive,¨ said Pant. Indian stocks declined and the rupee tumbled to a two-year low in reaction to the move by China.

¨The markets´ response to Chinese surprise devaluation of its currency against the US dollar is ample evidence that investors worry about further measures across Asian countries in order to prop up export competitiveness,¨ said Anand James, the co-head of the technical research desk at Geojit BNP Paribas. ¨A race among exporting countries to improve exports´ attractiveness may lead to competitive devaluation, especially in Asian currencies, and may also lead to sluggish internal demand.¨

Shilan Shah, the India economist at Capital Economics, said the fall in the rupee was not ¨a cause for concern¨, adding that ¨the moves in the renminbi are a sign of financial reform rather than a declaration of a currency war.¨ ¨The rupee also remains relatively strong on broader measures,¨ Shah said. ¨Since the middle of last year, the currency has appreciated by 10 per cent on a real trade-weighted basis, dampening the prospects for exports. A slight fall in the rupee may therefore be welcomed by policymakers.¨ China is a top five export market for India but its exports to China fell by 19.5 per cent to $11.9 billion in the past financial year compared to the previous year, according to India Ratings and Research. ¨Items whose exports were over $1bn included cotton, copper and its articles, mineral fuels and oils and organic chemicals,¨ Pant said. ¨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.¨

¨The sudden move on the part of China to devalue its currency yuan will have an adverse impact on India´s exports of textiles and clothing, which are facing already sluggish growth due to recessionary conditions in global markets,¨ Texprocil chairman RK Dalmia said.

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