On 07 January 2016, China's renminbi (RMB) depreciated against the dollar. Previously, on 11 August 2015, there was a significant devaluation in the value of RMB. However, the January 2016 depreciation was less unexpected than the devaluation in August 2015.
Today, China is a major player in the global trade system. Its trade grew exponentially between 2001 and 2008, with imports and exports each crossing the $ 1 trillion mark in 2008. The crisis initiated in the US in 2008 and in Europe in 2011 has resulted in a drop in Chinese exports. However, Beijing still enjoys a comparatively better position than the rest. Foreign trade is a crucial element in the country's economic growth, and this has been the trend throughout the past decade.
Over the past few years, China has been gradually liberalising its stock market for foreign investors. Although a weak RMB had negative impacts on stock markets across the world, the bigger cause for worry is something else. The slowdown in China's growth and Beijing's attempts to regain pace are evident. A slowdown in the world's second-largest economy (GDP measured in nominal terms) or largest economy (GDP measured in PPP terms) rings alarm bells for everyone.
Reasons for Renminbi's Depreciation
China exercises significant state control and influence towards determination of macroeconomic outcomes - a model different from those practised by other participating economies in the world market. Other economies follow either a capitalist model or mixed model, where the market plays a significant role in determining macroeconomic outcomes.
The People’s Bank of China (PBoC) has officially announced that they want the exchange rate to be determined by market forces as opposed to being state-controlled. This decision has now made the RMB cheaper it previously was. On several occasions in the past, China has manipulated the value of its currency in order to acquire a competitive edge for its products in the global market.
This time, the RMB devaluation/depreciation has come when the asset market bubble in China has collapsed and Beijing is looking for an export thrust to boost growth. Moreover, in the recent years, China has been investing in infrastructure and financial institutions, and also providing aid to developing countries.
China requires a robust growth rate for these activities to continue to be viable, and also for the success of its ambitious cross-continent One Road One Belt initiative.
A weak RMB against the dollar has made the already low cost Chinese products cheaper than its competitors', in the global markets. Consequently, China’s exports have increased, fuelling its economic growth. This is probably how China plans to regain its growth and attain a 'new normal' rate for its economic growth. A weakening of the RMB value could also be a manifestation of what it is undergoing in order to join the Special Drawing Rights (SDR) basket, scheduled for 01 October 2016.
Implications for the Indian Economy
The weakening of the RMB has caused severe negative effects in the stock markets all over the world. The Indian stock market followed the trend. Today, India's aims to become a manufacturing hub. New Delhi launched the 'Make in India' initiative to encourage multinationals as well as domestic companies to manufacture their products in India. This project has vast potential to attract foreign direct investments in the targeted sectors. A weak RMB will make India-manufactured products more expensive than Chinese products in the global market. Thus, an RMB 'revaluation' also has a potential to hurt the 'Make in India' initiative.
India runs a huge trade deficit with China. There are many manufacturing firms that already find it difficult to survive against Chinese competition; several firms have stopped manufacturing; and a weak RMB has further impeded the domestic producers from competing with Chinese products in the market.
India's Minister of Commerce and Industry, Nirmala Sitharaman, said “a decline in the value of China's currency against dollar may lead to a sharp increase in cheap imports which will hurt several Indian industries.” However, the weakening of the RMB also brought some good news for India, at least in the short run: it reduced India's current account deficit and trade deficit.
A fall in China’s growth means a fall in China's demands from the commodity market, which resulted in a drop in oil, gold, and steel prices, among others. India imports large amounts of oil and gold, and therefore, lower prices will help improve India’s current account deficit. Money thus saved could then be reallocated for other purposes. Having said that, India should not seek a slow economic growth for China. New Delhi must instead look for opportunities for its own economic growth.
Both Asian giants have manifestly benefited from globalisation, but the growth stories of both economies are markedly different. As rightly put by the former Indian Prime Minister Manmohan Singh, "there is enough space in the world for the development of both India and China and indeed, enough areas for India and China to cooperate."