By Ruma Dubey

The Chinese turmoil has become deeper. That’s the sense we get today morning.

The Chinese Govt once again, took the entire world by surprise by guiding its currency, the yuan lower, plunging all stock markets into the red. Chinese central bank cut its yuan reference rate by the most since August, sparking a selloff. China's yuan currency was guided lower by 0.51 percent to 6.5646 against the US dollar.

The Chinese stock markets shut down half an hour after it opened for trading when indices fell more than 7% - the limit which triggers off a circuit breaker.  This circuit breaker was started in 2016 and investors panicked the moment they saw it getting triggered, getting into a panic selling mode; they feared that like last time, their stocks could get suspended, leaving them nowhere.

The US dollar and Euro are freely traded while some currencies have an anchor or peg it to the US dollar. China’s method of controlling the currency was different. Like circuit filters on our stocks, the yuan could go either up or down, within a band of 2%, preventing wild fluctuations. But then the currency was never a true indicator of the real demand and supply scenario in the country. It was all fully managed, giving its exporters an unfair price advantage.

When China had devalued the currency in August, it had called it a “one-off” event while saying that market forces would be given a bigger role in the future, leaving open the possibility of more declines. And clearly it has decided to follow precisely that! What it also indicates, this yuan devaluation again within six months is that China’s economic woes are much more deep rooted than what we thought.

Devaluation helps a country, when in trade balance trouble, to lower the cost of its exports. The purpose of this devaluation is to thus improve trade deficit and imbalances through higher exports and lower imports.

With this devaluation, China is hoping that its exports will bounce back. For the people of China, it would mean higher prices of imported goods and overseas holiday/education costs. Though it would give impetus to the trade numbers, it truly drives home the truth – China re-engineered its growth for so long but now it needs to deliver a more balance, stronger growth, driven by domestic demand.  But it’s not all positives - A falling yuan might spur the outflow of capital. It will also put to risk China’s companies, which have amassed $1 trillion in foreign debt – they all will now have to pay more to service the debt as yuan loses ground. Also it will make imports expensive leading to cost push inflation. 

The Chinese Govt is drawing a lot of flak for its circuit breaker as they feel this creates more panic – already more selling is lined up the moment the bourses open when the 5$ halt is lifted. What is also exacerbating the situation is that the Chinese Govt is not being transparent – it is not being transparent – nether about the economy nor about the measures that it hopes to take.

Naturally, all markets across Asia are down in the red. Indian markets are also painted a deep red, currently down over 450 points. Almost all sectors are down but most pain is seen is power, oil& gas, realty, banking and consumer durable stocks.

Yuan devaluation is sure to put pressure on the Indian Rupee though it is not so aligned with Chinese yuan; so there will not be a direct hit to the rupee but the effect will percolate through the dollar. Companies exporting to China will earn lesser while imports from China will cost more, so metal companies in India could be hit. Yes, the dollar will get stronger and that would bode well for exporters and IT companies.

The Chinese turmoil is cure to affect Indian markets – it is more psychological but then markets are always all about sentiments, aren’t they? With no real trigger coming from within, surely the fall of Chinese markets will have a more magnified effect here.