Yuan Devaluation Conundrum

China has one of the most flourishing growth stories of mankind. The land of the dragon-acclaimed with the discovery of gunpowder, tea and silk among others-has overcome invasions, colonization and Western Supremacy to hold its position in the world. Revolutionized in 1949 as a centrally planned economy, the dragon broke out of its eggshell, pursuing the policies of economic liberalization and global integration post 1978. Since then, China has enjoyed explosive growth, making it the world’s largest. It has a mixed economy that incorporates limited capitalism within a command economy. It used to attract most of the foreign investments (~49% of the GDP), its working population was at its peak by 2012 and the technological gap between the advanced countries and China was reduced by 2015. But instead of relaxing its economy, the dragon undertook measures to further boost the economic growth which, in reality, slowed down since the double-digit rates before 2013 to approximately 6.5%-7% during the last two years.

Factors that led to Chinese slump are —

  • It is one of the most indebted nations in the world with a debt-to-GDP ratio of over 300% as on June 2019 (over US $69 trillion)
  • Longer period of cleaning bad debts because of a closed financial system
  • Global slowdown bringing down export driven demand of the Chinese manufacturing sector

Countermeasures taken by the government are—

  • Shift from manufacturing to the service sector
  • Implementation of proactive fiscal policies to increase domestic demand
  • Moving from export-oriented growth to consumer demand-oriented growth
  • Devaluation of Yuan Renminbi to boost exports

Among all other measures, the devaluation of yuan was taken as a double-edged sword. While some accused China of entering into a currency war, others felt that it might be an attempt to make a stronger case of inclusion in the IMF’s SDR basket.

Since 2005, Yuan had appreciated 33% against the US dollar. But, on August 11, 2015, the People’s Bank of China made three consecutive devaluations of its currency, knocking over 3% off its value. Many claimed it to be a desperate attempt by China to boost its exports in the slow growing economy, the PBOC claimed that the devaluation was towards making China a more market-oriented economy as committed by Xi Jinping on March 2013. In 2010, Yuan was rejected from IMF’s SDR for not being “freely usable” but the devaluation, supported by the claim of market-oriented reforms, made Yuan a part of the SDR in 2016.

The US-China trade war became murkier. Four days after Trump threatened to impose 10% tariffs on $300 billion worth Chinese imports, China decided to devalue Yuan to an eleven-year low (i.e. below 7 per dollar) on August 5, 2019. Global markets sold off on such a move, including US itself where the Dow Jones Industrial Average lost 2.9%. China was officially declared as a “currency manipulator” on August 5th, 2019. This naming opens up doors for US to consult with IMF to eliminate any unfair advantage towards Yuan.

A Slowdown in Chinese economy is bound to generate global ripples—

  • A weaker yuan makes Chinese exports cheaper. It will offset the impact of higher tariffs on Chinese imports into America. But it will also make imports into China expensive, driving up inflation and creating strains in its already slowing economy.
  • Many emerging market currencies like Turkey’s lira, Indonesia’s rupiah, South Africa’s rand, Vietnam’s dong, Brazil’s real and Mexico’s peso also weakened in value.
  • China consumes up to 50% of some raw materials, and the economic slowdown would severely impact the commodity related sector.
  • China impacts how crude oil is priced. The devaluation signaled the investors that the Chinese demand for the commodity would continue to decline as a result of which Brent Crude fell more than 20% after mid-August.
  • German companies earn 15-30% of their operating earnings and Volkswagen derives half of their total revenues from China. Semi-conductor chips, luxury goods and automobile industries are now recording a drastic fall in their sales as the Chinese turn local.

Though India has not been shackled by Yuan devaluation as some other countries, it will witness radical deep-rooted impacts. China is the biggest importer to India ($459.46 billion as on Sept, 19). These goods would now be available more economically. For India, every $1 drop in oil prices results in a $1 billion decline in the country’s oil import bill.

India will also benefit from the influx of investors who otherwise would have invested in China. With the slump in China, the turmoil in EU and the instability in Latin America, India is gaining in opportunity costs. With 100% FDI being allowed in defence, coal and aviation, foreign investments are sure to come in. India has also jumped up 14 positions from 77 to 63 in the “ease of doing business” rankings showcasing signs of improvements.

However, if India does not grab on these advantages presented by the Chinese slump, the very boon of the devalued yuan could be its bane. As a result of Yuan devaluation, demand for dollars surged around the globe, including in India, where investors bought into the safety of dollar at the expense of INR. The INR immediately plunged to a two-year low against the dollar. The threat of greater market risk led to increased volatility in Indian bond markets, which triggered further weakness for INR.

Also, with reduced commodity prices, Chinese producers can dump Indian markets with their products which has been a case in the textile, metals and chemical industries. China is also a major importer of Indian goods. The economic slump will, thus, be a major blow to the Indian trade deficit.

What India can do best now is utilize the benefits available from the Chinese slump for increasing its growth and development potential. A medley of opportunities presented before India by the ageing Chinese dragon can be realized if and only if it focuses on the development of all the sectors, reduction of inequalities and improvement in the standard of living of people which will be helping India to grow and prosper in the long run.

Harsh Goyal ( PGP 1 Section 6 )

What are Payments Banks?

It all started with a vision- one that of unleashing a digital revolution across India. The idea was to increase the penetration of financial services into places where actual banks failed to reach. And the concept, first put forward by the Nachiket Mor commission in 2014, was given the name, Payments Bank – a bank which isn’t actually a bank.

So what is a Payments Bank?

Payments bank is a registered public listed company that comes under the Companies Act, 2013. RBI has mandated that such banks have a minimum capital investment of ₹100 crore. For the first five years the stake of the promoter should be at least 40%, and 25% of its branches must be in unbanked rural areas.

A payments bank accepts deposits of up to ₹1, 00,000 and pays interest on them. The bank operates digitally and hence offers mobile payments and net banking services. It also issues debit and ATM cards. However, they are not allowed to carry out lending activities like granting loans, issuing credit cards etc. So they cannot earn from interests like the conventional banks.

Then the question comes – what is the source of their revenue?

  • One way is through investment. They invest in government securities and bonds fetching an annual return of about 7%. Payment banks provide the option of micro-saving, i.e. savings as low as ₹100, thus encouraging customers to deposit more.
  • Another major source of revenue can be data monetisation. It means generating economic benefits from the data available such as customer profiles, their interests and preferences, spend patterns etc…
  • They can earn interest by depositing in other banks or government deposits.
  • They are also involved in cross-selling to other financial institutions by providing them with insurance and loans.

So, is this a viable business model?

If we take a look at the existing payments banks in India, most of them are running a loss. But none of them expected a net profit before 5 years of operation. Airtel Payments Bank, the first payments bank in India reported a widening in the loss before tax in the financial year 2018-19, even though their total revenue increased. Paytm Payments bank launched in 2016 also has a similar performance graph. In 2017 came Fino Payments bank, with an aim to make profits within 3 years of operations. They are optimistic about doubling customer base and merchant points by December 2020.

It is too early to make speculations regarding the viability of this model since it is still at a very nascent stage. However, if the banks comes up with attractive financial offerings coupled with service quality and convenience, this model can succeed in achieving its objective, i.e. financial inclusion through digital disruption.

Written by

Taniya John (Editor, TJEF )

RCEP: Boon or Bane to Indian Economy

“RCEP will be the third largest jolt to the Indian Economy by PM Modi” – Jairam Ramesh

There has been a lot of buzz recently from farmers and other business associations regarding RCEP that it would destroy them economically. Although it was Prime Minister Manmohan Singh who decided to negotiate RCEP way back in 2012, Congress now opposes the RCEP. Nevertheless, keeping aside political gains, let us dive deep into RCEP to understand the scenario.

Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement between participating countries where they agree to reduce or eliminate the tariffs levied by each country on imports and exports of goods and services. There are 16 countries which are part of this agreement, 10 member states of ASEAN and 6 FTA partners namely China, Japan, South Korea, Australia and New Zealand. Upon implementation, this will tend to create a new comprehensive free trade area which is bigger than the European Union. This will help countries embrace economic integration and provide a platform to gain access to the global arena.

There are a number of multilateral trade agreements and FTAs between various countries, but why is RCEP particularly gaining so much importance. Let’s review some facts – the 16 Asia-Pacific (APAC) countries together account for:

  • 25% of global GDP
  • 26% of Foreign Direct Investment flows
  • 30% of global trade
  • 45% of world population

Hence, this holds much significance in the global economic context, especially, when the global balance is shifting towards the APAC region. This deal will reinforce the leadership of the region in global trade. This is the first-ever deal which will encompass China, India, South Korea and Japan providing a commitment in WTO.

The negotiations formally began in 2012 and is nowhere close to reaching a conclusion. This deal consists of 21 chapters of which only a few have been concluded. With rising protectionism and uncertainty in the global economic scenario owing to US-China Trade War & the Brexit cliff-hanger, the negotiations are facing a lot of frictions. However, China is firm to reach on a conclusion soon as it wants to present this as a response to the erstwhile Trans-Pacific Partnership (now known as Comprehensive & Progressive Agreement for Trans-Pacific Partnership), without the US being a part of it. This deal will make China’s position formidable in the ongoing trade war as it implicitly signifies the stance of the countries in it.

All the member nation representatives met on September 08th this year in Bangkok to arrive at tangible conclusion in order to proceed with the final ratification in the ASEAN summit this November. The meeting was delayed for more than 5 hours and everyone was busy in persuading one nation: India. India, a key player in the APAC region is sceptical with some of the terms of the deal. On the other side, there are a lot of protests emerging from the various domestic trade associations within the country. What is the significance of this deal for India? Why is there such a huge negative sentiment over this deal and what are the concerns of the Indian policymakers with regards to this deal?

This deal has a potential impact on the Indian economy as RCEP countries account for almost 27% of India’s total trade, about 20% of total exports and 35% of total imports. Upon implementation of this deal, it will open the Indian markets further by easing the tariff barriers and hence making India more vulnerable to huge imports which will further put pressure on the industries. The scepticism over the free trade agreement is not something driven by fear but has a rationale behind it. India’s previous experience of FTAs has been a sour one as it was always on the receiving end. Out of the 16 nations, India has trade deficit with 11 nations as of 2018-19. India already has FTAs with ASEAN, Japan and South Korea and its trade deficit has widened after signing these deals. India’s trade deficit with RCEP countries increased from $5 billion in 2005 to $105 billion in 2018. Of this, China alone accounts for $53 billion deficit, which is also under criticism due to the sudden jump in imports from Hong Kong. A report by NITI Aayog published a couple of years back noted that the utilisation rate of the FTAs by India is between 5% and 25%, one of the lowest in APAC region. The Asia Development Bank found that the complex origin rule criteria, lack of information about FTAs, higher compliance costs and administrative delays act as a hindrance for Indian exporters to pursue the preferential routes.

India has offered to relax tariffs on 86% of goods traded with ASEAN and upto 74% of goods traded with China, New Zealand & Australia. This proposal was also rejected by the nations, which stated it as “too little, too late”. India is also worried that the items on which duty cuts have not been provided to China can also end up in India through different routes. As a matter of fact, India has the lowest tariff barriers in the proposed RCEP region while China has the highest. Based on these concerns, India wants an ATSM (Auto trigger safety mechanism) provision, which will automatically increase the levies and tariffs beyond a particular threshold. India also wants the right to determine the differential pricing for specific products.

The Indian economic scenario is particularly gloomy right now, as there is a risk of slowdown posed upon it. The unemployment rates are at all-time high and the growth forecasts for India are continuously nosediving. The banking and financial sector is already stressed with the looming liquidity crisis and NPA problems. The Indian Automobile industry is also facing the heat with sales volumes continuously falling in 2019. At this point, Indian industries and workforce are not skilled and efficient enough to compete with manufacturing powerhouses like China and Japan. This deal will further deteriorate the situation as these countries will export more and more consumer durables, electronics, agricultural and dairy products which will further aggravate the situation of the farmer.

The cons of RCEP most certainly seem to outweigh the pros at this point of time, but the scenario could be completely different in the long run. While we know that India wants to become a $5 trillion economy by 2025, it would certainly not be possible without developing ties and gaining access to international markets. It is high time that our government starts looking inwards and focuses on the hindrances. When the global workforce is aging, India has tremendous opportunity in terms of its young population. This can be leveraged only when the human capital improves. In the recent WEF report, India slipped 10 places in the Global Competitiveness Index. This is worse than all BRICS nations except Brazil. The parameters should be analysed on where India fares badly. To gain and sustain high growth rates, technological adoption and skills play a key role. Indian economists and leaders should relentlessly work on these key issues as doing so would help in both the short term and the long term development of the country. This would certainly have the end result of helping India establish itself among other economies and make a mark on the world map.

Bharadwaj K A
Co-Managing Editor

Sovereign Wealth Fund -A Weapon of Mass Destruction?

About the Author:
Srikar calls himself an egalitarian Indian, whatever that means. He has lived an unusually non – linear career path, he wants to live like a nomadic hunter gatherer, albeit chasing knowledge and truth.
Srikar pursued his engineering in Electrical & Electronics department from BIT. Later he was LAMP (Legislative Assistant to Member of Parliament) Fellow. After the fellowship he led Mr Anurag Thakur’s project Sansad Mobile Swasthya Seva as the project lead in his constituency. He was also a core member of Mr Anurag Thakur’s General elections campaign management team.
In the time left, Srikar likes to read and write. He has also written a novel, The Girl on the Poster, available on Amazon Kindle. He is also a member of McKinsey & Company’s online executive panel.