All you need to know about Global crash in China : Part 2

In last part of this series we saw the global breakdown in Chinese currency. We also saw the impact on world. Few impact conditions are:

1)      Difficulties for Greece: If the Chinese devaluation does bring “tidal wave of deflation” to the global economy, the most vulnerable countries will be those that are heavily in debt – because while wages and profits fall in a deflationary period, the value of debts remains fixed, making them harder to service (to pay interest on). 

2)      The rupee has dropped 2.3 per cent against the dollar since August 11, when China first announced it was devaluing its currency. The stock market has been choppy since. The Sensex has fallen nearly 1 per cent since last week, while China's stock market is up over 1 per cent in the same period. This week it has fallen from 1600 pts which is the worst in 7 years.

On the other hand, India's exports are a mere 1.9% of total world exports and close to 14% of China's exports. Trade linkage to growth in China is high and hence it is facing the heat of falling global demand. 

Click here to read: All you need to know about Global crash in China : Part 1
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Impact on India:

1) Rupee volatility: The sharp fall in the rupee has already rattled stock markets, which fell for a fourth straight session. If the rupee continues to fall sharply, imports will become costlier, stoking inflation. This will force the Reserve Bank to hold on to high interest rates, which will hamper the ongoing economic recovery. Since India runs a trade deficit (imports are more than exports), chances are the current account deficit will also rise, which will further pressure the rupee. Falling rupee is bad for those companies that have dollar-denominated loans and also for foreign flows because stock market returns become unattractive.

2) Pressure on exports: In normal course, falling rupee would have aided domestic exports, which have contracted for seven straight months until June 2015. However, analysts are betting against a rise in domestic exports because of a global slowdown. The fact that China and India compete for several export items such as textiles, gems and jewellery, etc. will also go against domestic exporters

3) Dumping of Chinese goods: There's fear that the sharp devaluation in yuan will help China dump goods into the Indian market, which will impact domestic manufacturers. The fear is already playing out on the Dalal Street with tyre stocks and steel makers falling sharply.

Hence, we can see that the devaluation of Chinese yuan has impacted the whole world. China took such a decision for its economy to remain on an even keel, keeping growth and employment high and for its currency to become globally pre-eminent, helping promote the country's diplomatic goals and solidifying the country's centrality to the global economy. 


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About the Author:  Pranav Nikam is an Electrical and Electronics engineer who is working in a renowned MNC in Chennai. He likes to work out in gym, do photography and play badminton. Through his articles he wants to spread awareness among other defence aspirants.