Why Yuan's fall is making India Inc worried

The devaluation of the Chinese yuan for a second day in a row will impact domestic players across sectors.

China, which sets a daily value for its currency and restricts trading within a band of 2 per cent, devalued its currency by 1.9 per cent on Tuesday.

A day later, it again lowered the currency’s daily value by 1.6 per cent, taking the total depreciation to 3.5 per cent.

Along with some other measures, the Chinese government said these moves would allow market participants to have a bigger influence on the yuan.

However, in the interim and if the devaluation is permanent, it will impact many domestic sectors.  

The rupee has depreciated by 0.95 per cent in these two days.

Other currencies have also depreciated, some more than the rupee.

While tyre and steel companies are already battling rising Chinese imports, other industries like consumer durables, electronics and textiles are likely to feel the heat.

“Tyre companies are worried as a lot of new tyres as well as replacement tyres are now being imported from China and these are at least 10-15 per cent cheaper than the locally made tyres,” said the CEO of a large tyre company asking not to be named.

There is more proof that the industry is under stress.

In a report on Apollo Tyres this week, PhillipCapital’s analysts Nitesh Sharma and Dhawal Doshi said the company’s domestic division posted a 7 per cent decline in revenue as Chinese competitors continued to eat market share.

The India segment posted a 3.5 per cent year-on-year decline in sales volume.

“The devaluation of the yuan will have an impact on the competitiveness of Indian exports and signals a move by Beijing that it intends to keep its export engine going,” said Sri Rajan, chairman of consulting firm Bain & Company, India.

“While some categories of imports will become cheaper for India, the government and India Inc will need to collaboratively see how to calibrate a response in a manner such that it does not impact Indian exports,” added Rajan.

Many smaller textile companies which compete with Chinese players will find fewer takers for their products in overseas markets like the US and Europe.

Companies like Welspun, which had concentrated on the premium segment, would face less hardship, said a top Welspun executive.

Likewise, steel producers will face more pressure.

Although the government has levied anti-dumping duty on Chinese steel, it is far less than desired. Imports of steel from China, which were up 36 per cent in 2014-15, have grown close to 50 per cent recently.

A head of a steel firm said the Indian government must impose another 5 per cent anti-dumping duty on Chinese steel to protect Indian companies from a volatile international market.

The worry for China is that the trend in its exports is weak.

In July, for instance, Chinese exports plunged 8.3 per cent over the same month last year.

An overvalued yuan has been hurting Chinese exporters as it makes their products more expensive in global markets.

The 3.5 per cent fall in two days, however, may still be manageable for some domestic companies, but a further decline by 3-5 per cent, which some market participants expect in the next couple of months, will be damaging.

Image: A vendor holds Chinese Yuan notes at a market in Beijing. Photograph: Jason Lee/Reuters