August was an unprecedented month in many ways. A sharp rise in volatility, the single largest drop in the Sensex in 7 years, and complete uncertainty over the direction of the Rupee are just a handful of events that occurred last month.
However, lurking behind these events is the catalyst that propelled the chain of events: the devaluation of China's currency, the Yuan.
Here's what you need to know about the Yuan.
- The Yuan is "pegged" to the US Dollar. This means that, unlike the Indian Rupee which rises and falls against the Dollar based on pure supply and demand, the Chinese government essentially "fixes" the currency exchange rate for the Yuan.
- Economists have long been claiming that the Yuan was artificially undervalued, thereby hurting countries like India by enticing countries to purchase goods from China (where products would be cheaper due to the weak currency) versus India where the Rupee stood no chance in being able to compete with China.
- In early August, China devalued its currency. Despite economists from around the world clamoring that China was unfairly gaining an edge over all countries by artificially keeping its currency cheap, the devaluation further made the China attractive as a country to do business with. However...
- Virtually every country outside of China gets a bad shake on the deal. The US, being the largest importer of Chinese goods, has a tougher time selling its own products overseas due to- you guessed it- China's products being cheaper! Countries like India, Brazil, and all other developing countries that are looking to create their own "Make in" models are going to have an even tougher time now.
- The true purpose for China to keep its currency value and export prices low is that they are attempting to keep their competitors out of U.S. markets. That allows the Chinese to exert greater control over the supply chain into our markets. Because all countries want to buy goods, materials and services at the lowest cost, China can under price and thereby limit its competition in the U.S.
And so here's a hint: although we generally tend to not give "advice" or "tips" on what stocks to buy and sell, stay cautious with manufacturing company. You can't buy into a "Make in India" motto if there's no buyer at the end of the day.
Cheers,
Raghu