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Note on Chinese Yuan

Devaluation
Kotak Mutual Fund Update as on 12th August, 2015

Apr-15

Dec-14

Aug-14

Apr-14

Aug-13

Dec-13

Dec-12

Apr-13

Aug-12

Dec-11

Apr-12

Aug-11

Apr-11

Dec-10

Aug-10

Apr-10

Aug-09

12

Dec-09

Dec-08

14

Apr-09

China GDP In Structural Decline

14

10

12

Mar-15

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Mar-97

Mar-96

Mar-95

10

Mar-94

11.9

8
6

6.2

4
2

0
0

Chinese economy is in a structural decline as its rate of growth has moderated

from the high of 11.9% in 2010 to 7% in June-15 quarter.
Harmonised economic growth is considered a key component in ensuring political
and social stability in China. Therefore economic policy making involves almost the
highest level of participation

Source: Bloomberg

Trade Contribution to the Chinese GDP

While the contribution of net trade to Chinese economy may seem insignificant, the demand
stimulus and the income multiplier effect has propelled investment and consumption.

With the decline in the exports, the consumption and investment began to moderate.
With flagging real estate market and crash in the equities market, creating growth
stimulus may have been deemed essential.

Source: Bloomberg

Yuan Dollar Comparison

2500

450
400

Exports (LHS)
2000

300
250

RHS

1500

LHS

50.00%

Exports rate of growth(6 mva)

350

Imports (LHS)

Trade (RHS)

200

40.00%
30.00%

20.00%

150
100

500

50
0

10.00%
0.00%
-10.00%

2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Date

-50

Date
Jan-91
Feb-92
Mar-93
Apr-94
May-95
Jun-96
Jul-97
Aug-98
Sep-99
Oct-00
Nov-01
Dec-02
Jan-04
Feb-05
Mar-06
Apr-07
May-08
Jun-09
Jul-10
Aug-11
Sep-12
Oct-13
Nov-14

1000

60.00%

-20.00%
-30.00%

While the quantum of the trade continues to increase, the rate of growth is tending towards
zero. With last 6 of 7 months showing negative growth in exports.

Exports contracted 8.9 % yoy in July as a 14 % annual appreciation in the real effective
exchange rate choked off demand.
Moderating economy and degrowth in exports necessitated that China take measures
to continue to stem the decline.

Source: Bloomberg

Yuan-ing Trend against the Dollar

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Aug-14

Jun-14

May-14

Mar-14

Jan-14

Jul-15

May-13

Mar-11

Jan-09

Oct-06

Aug-04

Jun-02

Apr-00

Feb-98

Dec-95

Sep-93

Jul-91

May-89

Mar-87

Jan-85

Yuan against USD (long term)

6.2097

6.2

5
6
7
6.4

Yuan against USD (recent)

9
10

China has since 2009, allowed the yuan to rise gradually against the dollar; as it sought to create a
domestic demand stimulus.
This has changed now.
The impending US Fed rate hike and
the keenness of the Chinese central bank to stimulate exports saw the currency decline
against the dollar.
Albeit, the sharp fall on 11th and 12th August did come as a surprise.
How: China doesn't let its currency trade freely. Instead, it links yuan value to a secret basket of
currencies; pricing of which set in a somewhat ad-hoc and opaque manner. Now it has allowed yuan to
float 2% of previous days market close. Thus leading to market driven decline.
Source: Bloomberg

6.4279

Impact on others
On Currencies:
In response to yuan devaluation, Asian currencies
adjusted lower against US dollar.
With Bloomberg JPMorgan Asia dollar Index an index
which measures the dollar against a basket of Asian
currencies, slipped 1.66% to 108.39.

On Commodities:
Most Commodities are priced in dollars, so the weaker
yuan will raise the cost of imports for buyers in china.
This may affect countries which have significant
exports to China such as Germany, Japan, Korea etc.
Source: mint

Views
To revive the flagging exports, further depreciation of yuan may be needed.
It is estimated that a 1% decline in Yuan risks a capital outflow of around US$
40 bn from China. Although China, has the cushion to manage the forex
outflows.
Albeit the depreciation will impact Chinas hopes of including yuan as IMFs
SDR currency and its projection as an alternative to the USD.
Depreciation may induce other export oriented economies to also follow suit
so as to keep themselves competitive.
Since India is more inflation sensitive rather than forex demand
sensitive, RBI may allow the Rupee to depreciate more gradually and in
relatively lesser quantum.
In case of rapid decline in Chinese imports, the commodities(and
dependent economies) may suffer further. This while net positive for
India; may see deflation in investment inflows as global economy comes
under pressure.

DISCLAIMERS & RISK FACTORS

The information contained in this (document) is extracted from different public

sources. All reasonable care has been taken to ensure that the information
contained herein is not misleading or untrue at the time of publication. This is for the
information of the person to whom it is provided without any liability whatsoever on
the part of Kotak Mahindra Asset Management Co Ltd or any associated companies
or any employee thereof.We are not soliciting any action based on this material and
is for general information only. Mutual Fund investments are subject to market
risks, read all scheme related documents carefully.