Risk and opportunity

India can capitalise on the China-led crisis if it is able to pursue economic reform.

Written by Ajay Chhibber | Published:August 26, 2015 12:00 am
sensex, NSE, sensex today, sensex down today, bse sensex graph, bse sensex news, sensex down, stock market down today, stock market today, share down today, down share price, share market down reason, stock market downturn, nifty down today, nifty down today reason, market down today reason, indian market down today, why bse market down today The rupee has fallen almost 4 per cent against the dollar in the last two weeks, which ensures that the rupee-yuan exchange rate remains more or less unchanged.

French Emperor Louis Bonaparte’s prophetic statement, “Let China sleep, for when it awakes it will move the world” appears to be coming true. China is on the move and what happens in China will not remain in China.

The sudden devaluation of the yuan to make it more market-determined and facilitate its inclusion in the IMF’s Special Drawing Rights (SDR) basket has conveniently come at a time when China’s exports have sharply slowed. It signals that China is struggling to rebalance its economy as it tries to internationalise its currency. The initial 2 per cent devaluation has amounted to almost 4 per cent against the dollar. It has roiled global markets — US equities and the Sensex have crashed. More turmoil could come, given its high debt and weak financial systems. The IMF has deferred the yuan’s inclusion in the SDR.

The rupee has fallen almost 4 per cent against the dollar in the last two weeks, which ensures that the rupee-yuan exchange rate remains more or less unchanged. But other BRICS currencies — the real, rouble and rand — have depreciated much more. A currency war, especially as growth in global trade has fallen, is not in anyone’s interest. If the yuan were to weaken, India would need to protect itself, as many think that the rupee is overvalued at Rs 66 to the dollar and should be at around Rs 70.

The devaluation and ensuing global turmoil has shifted attention from China’s “one belt, one road” (OBOR) strategy unveiled in the fall of 2013. That policy is a sign that China is intending an ambitious outward-oriented investment strategy to encourage new trade and connectivity throughout Asia, with road and maritime links through the Indian Ocean to Africa, the Middle East and on towards Europe. It is a revival of the ancient silk road, but even broader in scope and scale, and will help China invest abroad and relieve some of its excess capacity.

New financial institutions linked to this strategy, such as the Asian Infrastructure Investment Bank (AIIB) and the New Silk Road Fund, have been established in Beijing. The New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA) have been set up in Shanghai. China has also recapitalised three banks — the China Development Bank, the China Exim Bank and the Agricultural Development Bank of China — to help finance projects linked to the new silk road strategy.

Many problems could arise in executing this strategy. Asean countries involved in the South China Sea dispute are wary of China’s intentions. The US is creating the Trans-Pacific Partnership with 12 Pacific Rim countries, which so far excludes China. Japan has increased its aid programmes and is pursuing a Japan-EU free trade deal. Concerns on past Chinese investments have surfaced in Myanmar, Sri Lanka and many parts of Africa. Russia is wary of China’s moves in Central Asia. India has not yet signed on to OBOR, as it has concerns over the China-Pakistan Economic Corridor and believes that the maritime silk road will create a “string of pearls” to encircle India. China is not happy with India’s involvement in the South China Sea. Prime Minister Narendra Modi’s trips to reignite relationships in Mongolia, Central Asia and the Pacific must have been noted in Beijing. India has countered China’s rising engagements in the Indian Ocean with its own spice route or “mausam” project.

Nevertheless, Asia’s two giants continue to engage on several fronts. Trade relations have increased substantially though India faces a huge and growing trade imbalance with China that the Chinese devaluation could further increase. Chinese investments in India remain quite small, at less than 0.5 per cent of all FDI in the country — less than even Poland, Malaysia and Canada. India needs to reduce its trade imbalance with China by attracting more FDI from China to get Chinese companies to “Make in India”. India has joined the NDB and CRA (with an Indian president) and the AIIB (as its second-largest shareholder after China). These new banks are a potential, although small, source of long-term infrastructure finance for India, and they represent a visible and tangible symbol of cooperation between India and China that can fructify and grow.
As China takes over the chairmanship of the G20 in 2016, expect more risk as well, perhaps, as more opportunity — in Chinese both mean the same. The yuan may weaken further and China may pursue more aggressive external policies to distract attention from domestic problems. But
if China becomes a riskier prospect, India could emerge as a more stable investment opportunity if it is able to pursue economic reforms and improve its business climate. India must also remain proactive on the economic and diplomatic fronts and ensure that China sees that competition with India will be costly, and cooperation will benefit both.
The writer is visiting scholar, Institute for International Economic Policy, Elliott School of International Affairs, George Washington University, US

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  1. R
    Ramesh Nittoor
    Aug 26, 2015 at 4:51 am
    There have been several reports on what is going wrong with Chinese economy, a common thread seems to be et creation and demand mismatch. The first long phase of export led economy which capitalized on labor migration from hinterlands ended around 2006; whereafter China opted for reforms 2.0 for life standards improvement. Chinese who have thought up the biggest ever economic transformation, and have achieved very high quality levels as well, are certain to figure their way out of this crisis, but their issues will certainly not end in short run. India it seems shall get atleast a decade of higher GDP growth to narrow the gap.
  2. P
    Aug 26, 2015 at 7:08 am
    What makes the Chinese crisis unpredictable is dearth of reliable non-manited data. China's GDP is considered as carefully managed charade. The debt-situation seems to be under-reported and no one knows the depth of this crisis. Even the highly centralized economic structure is not able to control the meltdown. However one may hide, the cat is bound to come out of the bag. There is a lesson to be learnt from this crisis. India needlessly adopted a new series to measure its GDP. This has raised more questions that it can answer. How the world will perceive our performance is based on data-integrity of these numbers. Moreover, the country need not be deluded by a sense of unwarranted complacency. GDP growth of say 8 per cent could be far lower in real terms, than it signifies. India's growth story has to be based on transparency, as against inscrutable perplexity of the Chinese economy.
  3. P
    Aug 29, 2015 at 8:12 pm
    I wonder when would India stop US, Euro-centric FINANCIAL PLANNING. China follwed German-intellect's communism (an idea born out of western militarism) which is inappropriate. India's Nehruvians took to this Western Socialism (modified communism) idea and reversed Indias growth. In the meantime Intolerant West recruited 'Indians' to denigrate our INDIA-FIRSTS, so that they will not allow Modis and his countrymen to follow a purely indian idea of non-militaristic, peace-promoting concept:: I PRODUCE WHAT YOU NEDD, YOU PRODUCE WHAT I NEED :: live and let live. WEST's God-Bless America policy refuses to include others. IT SAYS ITS WAY IS HIGHWAY and THEIR SINGULAR MOTTO:: IS to keep us their Eternal Economic slaves. Any financial planning by China or India will have to face this fact
  4. R
    Ramesh Grover
    Aug 26, 2015 at 8:19 am
    May be, the present crisis, despite its bursting nature, will establish a new equilibrium within Chinese internal dynamics and transform itself into an extraordinary growth engine. Chinese are very pragmatic and Confucian realism runs in their blood stream. The article has pin pointed all aspects of the present challenges, and it feels nice to see that it is being tackled on the right lines in India.
  5. R
    Aug 27, 2015 at 2:26 am
    Are you kidding me ? India is just incapable of seizing the opportunity while China is down and run with the show. Not that Mr. Modi lacks resolve but in India we just have too many negative forces that works in Tandem. India just cannot pull it off and it is a simple that. In India the losers have more power to put strangle hold on the winners. India I reckon is one frustrating place where we progress one step and and take two step backwards.
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