Inside the world’s largest international market in eastern Yiwu, Indian and Chinese traders who haggle for cut-price socks to hi-tech goods are discussing an imminent rise in the price of made-in-China exports. Prepare to pay more this year for your Chinese Ganesha shipped from Shanghai to Mumbai.
For the first time since July 2008, Beijing has signalled that it’s in a mood to allow the undervalued Chinese currency — called the yuan or renminbi — to appreciate from its fixed and artificially low exchange rate that Washington says unfairly subsidises Chinese exporters with trade and price advantages.
The world expects the yuan to start rising anytime, as early as this quarter, and the impact will trickle down to everybody from the shopper in Mumbai’s Crawford Market to the Indian traders sourcing goods from Shanghai to Yiwu and the manufacturers in China's southern factories.
As the currency climbs, business with the world’s top exporter and India’s top trading partner will head into new challenges. “The impact scenarios of a stronger yuan on Indian trade are very uncertain,’’ said an Indian diplomat tracking the issue in Beijing.
In Beijing and Shanghai, the top Indian buyers of Chinese technology are bracing for greater costs. “The appreciation means that in dollar terms, we’ll have to pay much more for Chinese technology,’’ M V Rabade, CEO of Adani Power in China, which sources power plant equipment for India, told the Hindustan Times.
Indian companies in China have been nervously number crunching. They estimate they can sail through a 5 per cent yuan appreciation, but any higher will pinch. “We’ll try to balance it out by negotiating hard with equipment suppliers to reduce prices,’’ said Rabade.
“Whatever gets lost in terms of currency can be gained in reduction of prices, but we’re not sure how the trend will continue in future.”
The majority of Indian business in China involves rupee to dollar to yuan transactions for Chinese equipment to the low cost Ganeshas. Indian traders say that yuan/USD appreciation beyond 6.0 will be risky business.
“The consumer will have to pay a higher price for Chinese products,’’ an Indian exporter told HT from Yiwu, requesting anonymity. “We can hold on to the price for a certain level, no more. As it is, Chinese labour and production costs have also risen.’’ But this week, after a long official silence from New Delhi, the Reserve Bank of India governor joined the global chorus urging China to reform its currency policy to correct trade imbalances that gave China a 196-billion-dollar surplus in 2009. For India the bigger picture is that costlier Chinese exports will make Indian manufactured globally more competitive.
“The yuan revaluation could benefit Indian exporters in sectors where China is a major competitor by making Indian manufactured goods more competitive on price, provided there’s no significant rupee vs dollar appreciation,” said C R Sasikumar, CEO of the State Bank of India in Shanghai.
But the impact on India’s 16 billion-dollar trade deficit with China is unclear. “India’s trade deficit with China may still go up rather than down as the dollar’s purchasing power falls in China,’’ the diplomat predicted. “As for China, it will be more competitive to invest overseas and in Indian infrastructure and manufacturing rather than just export.’’
Beijing-based UBS Securities forecasts that the yuan/USD rate will move from its fixed peg near 6.82 yuan/USD to trade at 6.4 by in 2010 and 6.0 by late 2011.
“In the next few years, we expect the RMB to appreciate by 5-10 per cent per annum in real effective terms,” said a latest UBS note.
China’s economy grew 11.9 per cent in the first quarter — the fastest since 2007. Beijing’s stance that the stable exchange rate helped its export-driven economy and world trade weather the financial crisis, now sounds outdated. A stronger yuan will lift the purchasing power of Chinese consumers to buy foreign goods, increase domestic demand and combat inflation.
“For those businesses that import into China, process and sell locally, yuan appreciation would be beneficial,’’ said Sasikumar. But those businesses that procure and process locally for exports could be adversely impacted, he said, if exports are invoiced in a foreign currency.
In Washington this month, President Hu Jintao told his counterpart Barack Obama that China would ‘firmly stick to reforming its currency exchange rate formation mechanism based on its own economic and social development needs’.
Speculation of a Beijing announcement also rose since US Treasury Secretary Timothy Geithner delayed an April 15 report that was expected to label China a currency manipulator, and made a surprise stopover at the Beijing airport to meet Chinese officials.
Chinese officials and exporters are worried that yuan appreciation will drive foreign buyers to cheaper Asian markets, like India. “If the exchange rate increases one per cent, our profits will drop more than 10 per cent,” an exporter was quoted in Xinhua this month.