Expert view

Nobody is going to let the Chinese economy slide

The yuan devaluation sent markets into a tizzy. For many Indian firms, China is a key export market. How should they manage this phase of uncertainty? We ask experts

Need to diversify, spur local demand
Harish H.V., partner, Grant Thornton India

The Chinese yuan’s devaluation has come as a surprise, though there was some action expected, says Harish H.V. “It is a clear sign of deterioration in the Chinese economy and China is taking steps to drive the one big strength of its economy, which is exports,” he says.

The impact of the latest action of the Chinese could be overall positive for Indian exporters in my opinion, says Harish.

“There will be a dip in commodity prices with possible weakening of Chinese demand, delays in Fed and Western world’s proposed interest rate increase (which means reduced risk of money flowing out of emerging markets), RBI possibly reducing interest rates using this event as a trigger, and continued weakening of the rupee,” he notes.

“Since we also import large volumes of Chinese products, these would become cheaper,” adds Harish. Indian exports to China include raw material such as ore, slag, iron and steel, textiles, plastics, organic chemicals, and cotton.

“Companies in these sectors need to be watchful of the overall signals emanating from the Chinese economy, which seem to indicate that a bubble effect exists there on asset prices and any deflation of this bubble would result in erosion of wealth, and hence weak demand for products or pricing pressures for products sold to China,” he says.

Given this, exporters to China need to start planning to diversify their markets beyond China into other countries and also look to stimulate demand within India.

Another important area to consider is the currency risk. “Indian companies need to price their exports in hard currencies such as US dollar or even in rupees than Chinese yuan, and then hedge their currency exposures,” says Harish.

Third, and this applies to all exporters, be more dynamic in your strategy and nimble to shift production, markets, pricing, etc. and align your infrastructure to be as asset light as possible and focus on building a culture of dynamism, he adds.

The article appeared in the Mint. The article can be found here.