Chinese Yuan Devaluations and its effects on MARKET

August 12, 2015

Chinese Yuan Devaluations and its effects on MARKET

Greetings from Hitesh! Yesterday also there was news from KASHMIR about Terrorist attack in Pulava. As told Market is also down!! Chinese also devalued their YUAN.  Now let us understand the effects of the same.

For the beginners – let us talk about some basics first.

How CHINESE rate is decided?

China tightly controls the value of its currency by setting a daily rate for the yuan versus the dollar. In China’s domestic market, traders are allowed to push the yuan 2% stronger or weaker for the day. But the People’s Bank of China often ignores those market signals when it sets the next day’s rate.

On Tuesday, it devalued the currency by 2% against USD. This is very big thing if you look into history of YUAN in last 20 years. Usually, the YUAN will move only a few hundredths of a percent against the dollar in a given day; the largest move this year had been 0.16 percent.

Against 0.16% - move this year – move of 2% in one stroke

is a BIG deal.

What does it mean at the GROSS level?

It simply means that if you have USD – you can get 2% more YUAN or 2% discount on the things you buy in YUAN or 2% more things. Let me explain – if I am converting 1 USD into YUAN – I will get 6.12 Yuan instead of 6 Yuan (assuming conversion rate of 1:6). If I am buying IPHONE – I will get 2% additional discount or I can buy more IPHONE upto 2% due to devaluation. Hope you are clear with this.

How do I see the situation?

Normally Monsoon is the season of SALE in India. With Internet players coming into the GAME – discount has become a common thing. Various retailers are offering 25% to 80% discount on various items.

There logic is simple – if they offer discount and they can sell their goods at little profit or little loss – they will have CASH to buy new things ahead of the DIWALI or pay for the NEW THINGS which they will get in September!! They also want to VACATE their GODOWN and DISPLAY space for the new things. This is possible only when old things go. So, discount makes sense.

When Discounts Works?

If you have the buying capacity and retailer offers you the discount it makes the sense. But if you do not have the buying capacity and retailer gives you 80% discount – you will not buy. When you do not buy – retailer’s strategy to give you discount and make good his lose fails!!

Chinese Strategy:-

After remaining steady for a long period of time – it is offering 2% discount!! The customer – USA – always pays him with PROMISORY NOTES (read Govt. securities) as it does not have the enough money to pay for CHINESE goods.

In the last year, the euro has dropped about 18 percent against the dollar and the Japanese yen has plummeted about 22 percent. I do not see their economy moving up significantly due to devaluation. So, with 2% devaluation or more – if they go to the extent of 10% - will not make much difference to CHINESE ECONOMY as their income will not go up.

Chinese economy as reported in MEDIA is in BAD SHAPE. With such devaluations – economy will get more negative effects. The way it is happening with Japan and Europe.

How this can be POSITIVE to Indian MARKET?

With CHINESE devaluation – if FOREIGN investors in CHINA sell shares – they will have less USD when they want to repatriate their money to their home countries. Inversely – those who have USD can buy more shares in CHINA now.

Looking at the CHINESE economy – FII may wait for investments in CHINA and they may invest those money into the FASTEST GROWING economy – INDIA. If FIIs expect more devaluation say upto 10% - they may sell now to reduce their loss and those money can also come to India!!

How it can affect GLOBALLY?

There are N numbers of experts talking about this. My understanding is very basic – if your customers don’t have purchasing power – no amount of discount can change your situations. As such 2% is no discount at all!! So, globally also things will get settled.

Will it affect Indian Industries?

India lacks way behind CHINA in terms of Infrastructure and manufacturing capacities. Our edge in exports is in the area of HUMAN RESOURCES ( KPO / BPO / IT / RESEARCH) and not in production. Moreover, Rupee will also get devaluated by market forces to adjust to CHINESE rate. So, it’s not going to affect very much in the long run. In response to 2% devaluations, Indian Govt has increased the base metal import duty with immediate effect by 2.5% to ward of the effects of 2% devaluations.

My Personal Call:-

Most experts talk about change in attitude of china rather than the percentage. They see CHINA is ready to change.

I am not an expert.

My understanding says – say I am a conservative Father and my daughter wants to go into FILM LINE. After much convincing if I permit her – there is no GAURANTEE that my daughter will become number 1 heroin in Bollywood!! Same goes for Chinese devaluation!!

Just relax. Invest in good businesses the way Warren is buying in USA.

Have A GREAT MID WEEK.

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Live With Passion…. Invest With Passion.

Hitesh Parikh