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6 things to know about China’s falling Yuan
Publish date: 2nd July, 2018
The two biggest economies in the world are embroiled in a trade war. Both the United States of America and China have been threatening each other with new tariffs on each other’s exports. As a result, the Chinese Yuan has fallen by more than 3% against the dollar in the past fortnight. This has got many in the Indian market nervous too.
So, what’s going on with the Yuan and how does it impact India? Let’s find out.
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What’s happening with the Yuan?
The Chinese Yuan is generally considered to be a stable currency by traders all over the world. However, its performance has not been very good in recent times. The Yuan fell to its lowest point in 2018, resulting in its longest losing streak in the past two years. The last time such a major drop occurred was during the devaluation of the Yuan in 2015. The Yuan had experienced a 3% drop in just two days. In comparison, the current fall took two weeks. Read more about the Yuan devaluation here.
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How it affects China’s bond yields
Generally, a falling currency does not spell good news for bond yields. When a currency depreciates, inflation rises and global investors tend to keep away from bonds. This causes bond yields to rise up. However, China’s bond yields reached their lowest level in more than a year. This has happened despite the falling Yuan. One of the reasons is that foreign investors held just around 2% of Chinese government debt at the end of last year. As a result, this was not large enough to make a big difference in bond yields.
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How it impacts India?
A weaker Yuan against the dollar puts pressure on the Indian rupee. If the Yuan continues to slide, it is possible that the rupee gets dragged down too. This could have a negative impact on many fronts. For instance, India imports 80% of its oil requirements. A falling rupee means that the import bill would be much larger than expected. This could cause a dent in the Current Account Deficit (CAD). Find out more about impact of rising oil prices here. In addition, this could result in a rise in inflation.
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Some perspective
After 2008, there was pressure on China to devalue its currency as it seemed overvalued. Even the rupee had depreciated at that time. However, China refused to act on this considering the macro-economic challenges it faces. Today, many suggest that the trade war could be a way to get China to devalue its currency.
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Further devaluation possible
The current devaluation could be a teaser. More devaluation could be expected gradually in the long-run, especially if the trade war continues. (Read why India needs FII investments)
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Why it’s important to track Yuan?
Chinese Yuan is very important because FIIs tend to exit from the Asian market. This can affect commodity prices, which in turn has a cascading effect on Indian markets.
The bottom line
The current trade wars have the world economies on the edge of their seats. Even India has become a part of this war; joining the EU and China to impose retaliatory tariffs on more than a dozen goods from the US. With the threat of more tariffs in the near future and the Chinese government’s measures to halt a disorderly slide in the Yuan, it is matter of waiting and watching regarding bond yields in the coming months.
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