Millennium Post

Collateral damage

Falling Yuan threatens Indian prospects amidst the Sino-US trade war

Collateral damage

The trade war between the United States and China entered a more critical phase last week as Beijing allowed its currency to further weaken. The falling Yuan has become a major concern for not only the US but also the rest of the world. Lower Yuan will help China dump more of its exports on other economies. Export to China will be more difficult. President Trump's Treasury Department has formally labelled China a 'currency manipulator' as Chinese enterprises have stopped making fresh purchases of farm products from the US. In so far as India is concerned, lower Yuan may further flood Chinese goods into the Indian market and adversely impact the country's economic growth and Prime Minister Narendra Modi's 'make-in-India' drive. The Indian economy is already showing an uncomfortable downtrend since October 2018. The official data released by China's Customs Department showed India's trade deficit with China in 2018 climbed to $57.86 billion from $51.72 billion in 2017. The two-way trade in the first five months of the current year has, however, declined by 3.5 per cent year-on-year amounting to $36.87 billion. By manipulating Yuan, China could push more exports to India. Conversely, India's limited access to

China's market will face a further strain. Cheaper Chinese products can also outpace India's imports from other markets while India's efforts to raise exports to China will be more difficult to accomplish.

The falling Yuan has also shaken the world stock markets, including India. As a result, the benchmark BSE and NSE indices failed to respond positively to RBI's unconventional 35-basis-point (0.35 per cent) cut in interest rates, last Wednesday, with the Sensex closing 286 points lower at 36,690—a five-month low for the index. There was across the board selling. Though the markets picked up on Thursday and Friday, investors are concerned about RBI's decision to lower the GDP growth rate for 2019-20. Nervous

foreign portfolio investors (FPIs) are looking for safe places to park their money. Incidentally, Wall Street suffered its worst day of the year on August 5, with the S&P 500 closing nearly 3 per cent down. Selling was especially heavy in the trade-sensitive technology, consumer discretionary and industrial sectors. Yields on United States Treasuries, which fall as prices rise, dropped as investors sought safety in government-backed bonds. Benchmark indexes in Asia and Europe also fell. On August 4, the People's Bank of China, the country's central bank, took steps to limit the impact of President Trump's next round of tariffs by letting its currency weaken past the psychologically important point of seven Renminbi to a US Dollar for the first time in more than a decade. A weaker Yuan will make Chinese goods cheaper to sell abroad, allowing businesses and consumers to help offset the additional tariffs the US plans to impose on September 1. It also harms all exporting nations, including India, that are trying to compete with China.

China's People's Bank put the blame for the fall in Yuan's exchange rate on

President Trump's "unilateralism and trade protectionism measures and the imposition of increased tariffs on China". The country's state-run Xinhua News Agency called the president's move a "serious violation" of an agreement reached only last June with President Xi Jinping. China did not take lightly the US Treasury Department's latest label on China as a 'currency manipulator', for the first time in the last 25 years. In a statement, the US Treasury said it "will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China's latest actions". On its part, the US may further raise import tariffs to negate the impact of Yuan downslide to restrict the entry of products from China. Can India also raise imports duties to check further entry of Chinese goods in the Indian market?

Hopefully, India's finance and commerce ministries have initiated preparations to assess the full impact of the Yuan devaluation on the country's imports, the trade balance with China, and, more importantly on the country's falling economic growth trend. India can't afford to remain a silent spectator to China's latest round of currency intervention and let its market be further swamped by 'made-in-China' products. It is universally well recognised that behind China's massive export growth and economic surge over the years has been its centrally-controlled economic policy that held down the value of its currency for many years.

Lower Yuan also poses a major threat to India's ambition to become a $5-trillion economy in another five years. The latest slowdown in India's economic growth rate has already proved wrong the Union Finance Minister, Nirmala Sitharaman's claim during her 2019-20 budget presentation that the country has become the world's sixth-largest economy. According to the latest World Bank data, India has slipped back to the 7th position in the global GDP rankings in 2018, marginally behind the UK and France. As per an earlier data, India was on the sixth position in 2017, ahead of France (GDP: $2.582 trillion). A new data suggested that India was, in fact, the fifth-largest economy ahead of even the UK. India's GDP was at $2.65 trillion, while the UK's was at $2.64 trillion, followed by France at $2.5 trillion in 2017. The question now is: what happens to India's economic growth linked with its $800-billion-plus foreign trade and a record trade deficit of $176 billion in

2018-19, over 30 per cent of which was on account of China trade? India is already worried about the impact of Brexit, which comes into effect in another two months, on its economy and foreign trade. The country needs to work out a strong strategy that will protect its economy and growth against external financial and trade aggressions. IPA

(The views expressed are strictly personal)

Nantoo Banerjee

Nantoo Banerjee

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