Macroeconomics Update

China Economic Update
21st June, 2010

Facing growing pressure from around the world, The People’s Bank of China announced on Saturday that it is prepared to allow the country's currency to float more freely against the dollar and other foreign currencies. The bank said that “this step is in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China” This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual impact on Chinese economy • On one hand it would make the Chinese exports expensive for the world market and will benefit exports from other competing countries like India, Brazil and other South East Asian economies • On the other it would make imports cheaper for China and will give the government a strong tool to manage its inflation, increase the purchasing power of the people and resulting in more broad based growth and in turn leading to the establishment of service sector in the country All and all this move by China is good news for the global economy and other developing countries that are unable to compete with China in terms of exports because of its week currency.

Indian Perspective
This will ease India’s trade deficit with China and will help Indian exports of textiles, leather products, marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese exports. The trade between India and China soars closer to the US$60 billion target, India’s trade deficit with China is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian manufactures.

Macroeconomics Update

Exhibit: Sectors/Companies Impact of Stronger Yuan Sector Companies Impact Reason Hindalco Sterlite Stronger Yuan will lead to a slowdown in Chinese Metals Positive dumnping of Metal goods into India and give a level Sesa Goa Tata Steel playing field to Indian producers SAIL Positive that export is likely to go up on account of Yuan Maruti Suzuki Auto Tata Motors Mix revaluation & negative that auto ancilliary parts, domestically will become costly M&M Bharat Forge Exports and demand by domestic original equipment Auto Ancillary BOSCH Positive manufacturers (OEMS) is likely to go up Motherson Sumi Reliance Power Power Cost of production will go up, as companies will have to Adani Power Negative JSW Energy Companies purchase equipment at competitive prices Tata Power BGR Energy Bharat Bijlee Exports and demand by domestic power companies is Power Ancillary Positive likely to go up EMCO Voltamp transformers Bajaj Electrical Lloyd Electrical Positive that exports & domestic sales will go up while Consumer Mix negative that raw material prices will soar up Goods Blue Star Hitachi Home Hindustan Construction Cost of equipment is likley to go up, resulting in higher Construction Nagarjuna Construction Negative Capex and thus reduced cash flow IVRCL Infrastructure BHEL L&T Exports and demand by domestic power and Capital Goods Positive Alstom Projects infrastructure companies is likely to go up Areva T&D Nilkamal Stronger Yuan will lead to a slowdown in Chinese VIP Industries Plastics/Toys Positive dumnping of Plastic Materials into India and give a level Supreme Industries playing field to Indian producers Hanung Toys Will Increase the demand by Indian telcom companies as NuTek India Telecom Mix for them the Chinese goods will become costly and Kavveri Telecom Equipments negative since there spare parts cost will increase Astra Microwave Bombay Rayon Fashion Exports and demand by domestic original equipment Textiles Positive Century Textile manufacturers (OEMS) is likely to go up Arvind Textile Source: Kredent Research Advisors

Macroeconomics Update

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