Devaluation of China’s Renminbi – Impact on Textile Business

07 Sep 2015

Devaluation of China’s Renminbi – Impact on Textile Business

September 07, 2015Market Watch

China Scraps Yuan Peg To US dollarSurprised and Shocked!!!

China move to devalue its Renminbi (currency) trigger as an unpleasant currency war with alike moves anticipated by other exports-dependent economies with a purpose to capture a larger pie of the shrinking global trade.

China and India are almost the fall back economies of the global financial world. Economies in the Euro Zone are struggling to get out of recessionary trends. USA is displaying patchy recovery in its economy as they are dependent on China and India. As soon as China devalued its currency, it sent shock waves across the world. At the same time for the UK, which imports and exports a lot to China, the pound sterling lost a huge percentage of its value.

China is the biggest competitor of India in the textile sector. Due to the devaluation, the Chinese textile companies will be able to sell higher quality textiles at lower rates in India. In the lower segments of the textile industry, devaluation will lead to a massive decline in the profits of the Indian Textile Companies. India would then have to erect tariff barriers to discourage cheaper Chinese imports to protect its domestic industries, especially in the textile sectors.

Its impact on Indian exporters:

Indian textile exports are already feeling pinch from China. Yarn exports from India have experienced a hit owing to dwindling demand from the Chinese market.  However, at the same time, slowdown in China had led to some apparel export orders shifting to India.

Exports of textile in the international market is facing challenge from depreciating currency at a time when Indian rupee is on an upward move. Thus, buyers are preferring China’s products due to price advantage as Chinese buyers have been offering their produce at competitive rates. Direct export of cotton and cotton yarn to China is getting impacted due to change in Chinese policy of selling cotton from reserves at reduced price.

China, being India’s competitor in textile now has an added advantage in terms of pricing as their currency has been depreciating for the last few months. India had a cost advantage compared to China where labour cost is high but now it is getting offset due to the depreciation in the currency, yuan.

Its impact on global major currencies’ are:

The Chinese yuan devaluation has been the major driver of the massive volatility in the foreign exchange markets over the last few weeks. Asian currencies have been negatively impacted the most due to the perceived risk of an impending currency war. Economies could compete against each other to have the upper hand in elevating export volumes and price value.

China Currency affecting other currencies Other Impact globally:

  • Crude oil prices have been impacted badly as China accounts for more than 10% of the global consumption.
  • Devaluation of the Yuan has increased the bargaining power of exports, improve international competitiveness, conducive to the recovery of export market share.
  • Raw material prices has been reduced drastically.
  • It has given the Federal Reserve another reason to delay raising interest rates.
  • China’s large exporters for textiles will become a little more cost competitive again, and their ability to sell goods abroad helps with a softer landing at home.
  • Buyer of Indian textiles will now start looking at cheaper products coming from China.
  • Indian textile manufacturers might have to renegotiate on the prices to catch up with the Chinese market, to protect their sales.
  • Cheap Chinese exports have devastated South Africa’s textiles sector and as commodities weaken, Chinese investors have become increasingly skeptical about Africa.
  • More competitive prices from China’s exporters may be a boon for U.S. importers, and that will help the bottom line for U.S. companies by improving their margins.

Finally, China made a calculated move to devalue its currency as there was no other choice for an economy which had been overheating from many months. The devaluation was in the offing as a correction but no one saw it coming so swiftly. China’s timing was sudden for the world but not for itself. It sent a whiplash across global economies. Had it a year ago, when China’s economy was robust, no one would have complained because the impact would have been much less. The Chinese currency devaluation represented the largest Yuan depreciation in 20 years; and its effects are going to be felt thousands of miles away making a big difference to the world.

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