Yuan de-pegging move will give rupee a fillip

China’s announcement on Saturday that it would effectively de-peg its currency, the renminbi, from the US dollar could be massively bullish for currencies of emerging market economies in Asia, including India, say analysts.

And global markets could be enthused by an appetite for greater risk that China’s move will induce, they add.

More generally, the move to de-peg the yuan will “unleash powerful cyclical forces both within and outside the Asian region,” says Societe Generale economist Glenn Maguire. Yuan appreciation, in his estimation, will “effectively share more of China’s growth with the rest of the world.”

The Indian rupee is “particularly well-placed to gain” from the de-pegging of the yuan, notes Standard Chartered foreign exchange strategist Priyanka Chakravarty. In a research report to clients, she added that the USD-INR was likely to “convincingly breach 46.00, and the market would likely focus on the 100-day moving average of 45.70. But the key to sustaining gains by currencies of Asia ex-Japan economies would be some follow-through from China on an appreciation of the yuan in the coming days, the report added.  

An appreciating yuan, says Maguire, will “automatically increase the purchasing power of both China’s corporates and households”. History has shown that “even a gentle pace of yuan appreciation” is a “powerful tonic” for economies and assets that are leveraged on Chinese growth.

In particular, in his estimation, capital goods exporters of Asia —- Japan, South Korea and Taiwan —- and the world’s bulk commodity exporters —- Australia and Brazil —- are the key beneficiaries of China’s current growth model.

Deutsche Bank’s Greater China chief economist Jun Ma, however, reasons that although the initial reaction of commodities and commodity currencies will be positive, the effect may not last.

“Our model shows that the negative impact of RMB appreciation as a tool of policy tightening may fully offset the positive ‘substitution’ effect on global commodities.” Thus, he reckons, the initial positive reaction of commodity currencies to the RMB reform “can easily be reversed later due to the lack of real benefits”, especially if fixed-asset investment growth slows in response to other policy actions in China.

Standard Chartered analyst Callum Henderson sees a “knee-jerk move lower” for the US dollar against both emerging market and G10 currencies as a consequence of the yuan action. “Particular beneficiaries could be those who export to China —- whether in commodities or manufactured goods.”

On balance, when China, the world’s largest emerging market economy, allows for a modest and gradual appreciation of its exchange rate, this may make other emerging market economies more tolerant of currency appreciation, he adds.

Analysts also point to an indirect channel of how a more flexible yuan could affect Asia: via capital flows. If the market prices in an appreciation of the yuan, even if moderately, international capital flows could return to Asia in search of yield. “Further to prospects of currency appreciation, a more sustainable fiscal environment and better growth prospects will continue to underpin its optimism on the region.” This could imply that Asian central banks’ worries about asset inflation could return soon.

Patrick Chovanec, associate professor at Beijing’s premier Tsinghua University, runs down the list of winners and losers from the yuan move. Among the losers, he says, are Chinese exporters at the lower end of the value chain who will be rendered less competitive. “But I don’t think it will have a devastating effect on value-added exporters.”

Among the winners: Chinese consumers, who will have more buying power; China’s trading partners, who sell to these consumers; the Chinese central bank, in so far as it will now be able to run a more independent monetary policy that is not chained to maintaining the dollar peg; and, finally, the renminbi itself —- because this takes it a step further down the road to its becoming a global currency.