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The China syndrome and its Implications

The Yuan all set to appreciate! ShareTipsInfo discusses its implications for traders and investors alike while giving its customers a strong tip on the probable state of the Indian market in the foreseeable future.

 

The move
China, the world’s third largest economy was always unlikely to allow its currency appreciation under global pressure especially from the U.S. of A. The deal however was always a go-ahead as its domestic issues arose due to internal pressure of inflation. On 20/06/2010, China decided on the prospect of a more flexible Yuan, thereby bringing an end to the hold-up of its currency against the before a G-20 summit. We feel that this move is based on the underlying impact that an increase CNY would have on its domestic economy. The decision has been confirmed on grounds of a consistent economic improvement though no specific timescales have been set as of now. According to an official statement issued by the People’s Republic of China, “It is desirable to proceed further with reform of the renminbi( or Yuan) exchange-rate regime and increase the renminbi exchange-rate flexibility.”
We will be discussing the implications of such a move on the Indian and overall global markets in perspective.

Global Implications

• As of now, China enjoys the “benefit” of being able to de-valuate its own currency by buying USD in an open market thereby pegging back the value of the CNY against the USD. Should the move go forward, the likelihood of purchasing USD would reduce. With the demand and supply dynamics, the principle in question would be a weak USD in comparison to the CNY.
• The move will also decrease the flak issued by President Obama and other G-20 leaders, who have blamed the former for being overtly reliant on an undervalued currency to promote exports.
• The result could be a floating exchange rate globally. The move will not only ease the pressures other potential exporting countries have faced in the past but also reduce global inflation
• According to Jim O’Neill, Chief Global economist, Goldman Sachs Group, “It makes it a lot more difficult for Washington and Congress to do China bashing, The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”

Implications for Indian markets

• Indian exporters have apparently hailed the move however, the commitment to its statement is what still leaks a little apprehension in the Indian mind.
• The single thought on our domestic exporters’ minds would be to pray for the Indian rupee(hereafter, mentioned as INR) to not appreciate further as the hardness of a currency would define its costing to prospective customer(read=importers!) If the Indian currency is hard, then it pricing will experience an increment, else, it’s a win-win situation for India Inc.
• The Chinese move will be beneficial for Indian exporters because all the demand flow can be easily diverted to India. The US counterparts may not be able to afford to avail goods at high costs from China.
• Global stocks may rise on the potential benefits of the policy shift for trading partners including the U.S. especially companies which are most labour-intensive will be benefited such as textiles, steel, leather, etc, wherein Indian companies were often seen struggling by that crucial 2-3% against its neighbor of the north.
• China will see a greater demanding power and demand for commodities as the Chinese currency appreciates which will result in the former being able to afford more commodities with a strong currency at a much reduced cost.
• Unless there is a downturn in the Chinese economy, it is almost certain that commodity prices will appreciate as well, which could be a brilliant piece of news for commodity traders as well.

This may see a boom in Indian markets as most of it is still run by companies based out on being providers to companies across the globe as a slight change in direction by China’s erstwhile “customers”. It is important that we take this move as a step that will define the fate of the Indian market in not-so-far future. While it does look most likely to favor Indian markets, the promise is yet to be kept.
The Indian stock market can be your best friend if you trade wisely following a strong technical and functional based research. At ShareTipsInfo, we always aspire to offer our customers the best research available in the country with a keen eye on the Global perspective as well.

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