Chanakya National Law University

EFFECT OF CHINESE DECISIONS OF DEVALUATION ON INDIAN STOCK
MARKET – CRITICAL APPRECIATION
CHANAKYA NATIONAL LAW

UNIVERSITY
TOPIC- EFFECT OF CHINESE DECISIONS OF DEVALUATION ON

INDIAN STOCK MARKET – CRITICAL APPRECIATION
SUBMITTED TO: DR. MANOJ MISHRA

SUBMITTED BY:
ISHAN BRAMHBHATT
THIRD SEMESTER
(2017-2022)
ROLL NUMBER-1733
B.A LL.B (HONOURS)
1
ACKNOWLEDGEMENT
A project is a joint endeavor which is to be accomplished with utmost compassion,
diligence and with support of all. I am overwhelmed in all humbleness and
gratefulness to acknowledge from the bottom of my heart to all those who have
helped me to put these ideas, well above the level of simplicity and into something
concrete effectively and moreover on time.
This project would not have been completed without combined effort of my
teacher DR. MANOJ MISHRA whose support and guidance was the driving force
to successfully complete this project. I express my heartfelt gratitude to him.
I owe the present accomplishment of my project to my friends, who helped me

immensely with sources of research materials throughout the project and without
whom I couldn’t have completed it in the present way.
I would also like to extend my gratitude to my parents and all those unseen hands
that helped me out at every stage of my project.
2
EFFECT OF CHINESE DECISIONS OF DEVALUATION ON
INDIAN STOCK MARKET – CRITICAL APPRECIATION
DECLARATION BY THE CANDIDATE
I hereby declare that the work reported in the BB.A. LL.B (Hons.) Project Report entitled
“EFFECT OF CHINESE DECISIONS OF DEVALUATION ON
INDIAN STOCK MARKET – CRITICAL APPRECIATION” submitted

at Chanakya National
Law University, Patna is an authentic record of my work carried out under the
supervision of Dr. Manoj Mishra. I have not submitted this work elsewhere for
any other degree or diploma. I am fully responsible for the contents of my
Project Report.
(Signature of the Candidate)
ISHAN BRAMHBHATT
Chanakya National Law University, Patna

3
AIMS AND OBJECTIVES

The People’s Bank of China announced a cut in its daily reference rate and the
decision was made by the China observing the decrease in exports in the month of
July 2015 by giving the caution to China and the world countries. Hence, the
present paper focuses on studying the impact of devaluation of Yuan on Indian
Stock Market.
RESEARCH METHODOLOGY
This project is based upon doctrinal method of research. This project has been
done after a thorough research based upon intrinsic and extrinsic aspects of the
project.
Sources of Data:
 WEBSITES
 BOOKS
 MAGZINES
Method of Writing:
The method of writing followed in the course of this research project is

primarily analytical .
4
TABLE OF CONTENTS
ACKNOWLEDGEMENT 2
AIMS AND OBJECTIVES 4
RESEARCH METHODOLOGY 4
CHAPTER 1: INTRODUCTION 6
CHAPTER 2: DEFINITION OF DEVALUATION 7-8
CHAPTER 3: CAUSES AND EFFECTS OF DEVALUATION 9-10
CHAPTER 4: REASON FOR DEVALUATION OF YUAN BY CHINA 11-13
CHAPTER 5: IMPACT OF YUAN DEVALUATION ON INDIAN ECONOMY

AND INDIAN STOCK MARKET 14-16
CHAPTER 6: IMPACT OF YUAN DEVALUATION ON INDIAN INDUSTRIES

17
CHAPTER 7: DATA ANALYSIS 18-22
CONCLUSION 23
BIBLIOGRAPHY 24
5
CHAPTER ONE: INTRODUCTION
The People’s Bank of China, China’s Central Bank announced a cut in its daily reference rate by
a record 1.9% on 12th August 2015, the jolt to the economy in the last two decades. The decision
was made by the China with decrease in exports in the month of July 2015 by 8.3% by giving the
caution to China and the world countries that there is a slump in the market and “All is Not
Well”. The devaluation of Yuan strengthened the U.S. Dollar whereas other currencies reeling for
cover and Rupee was not an exception to this and it dropped to two-year low @ Rs.65 per Dollar.
While India is already struggling on the domestic front with legacy issues like infrastructure and
stalling of key legislation, a loss in currency competitiveness against the Yuan further hurt its
ailing exports. This move of China made India to think of the pivotal points like Rupee volatility;
exports under pressure, dumping of Chinese goods in India. In addition, importers are going to
get products from China at lower prices, and face competition on account of devaluation. Further
this move has roiled global financial markets and Foreign exchange markets. With the above
backdrop, the current paper focuses on giving empirical evidence on how devaluation has
affected Shanghai Composite Index of China and its impact on S&P 500, FTSE 100, S&P BSE
Sensex, HangSeng, Nikkie 225, and Bovespa indices across the globe.
6
EFFECT OF CHINESE DECISIONS OF DEVALUATION ON INDIAN
STOCK MARKET – CRITICAL APPRECIATION
CHAPTER TWO : DEFINITION OF DEVALUATION
Devaluation is a deliberate downward adjustment to the value of a country's currency relative to another
currency, group of currencies or standard. Devaluation is a monetary policy tool used by countries that have
a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is the opposite
of revaluation.
Devaluing a currency is decided by the government issuing the currency, and unlike depreciation, is not the
result of non-governmental activities. One reason a country may devaluate its currency is to combat trade
imbalances. Devaluation causes a country's exports to become less expensive, making them more
competitive in the global market. This, in turn, means that imports are more expensive, making domestic
consumers less likely to purchase them, further strengthening domestic businesses.
While devaluating a currency can seem like an attractive option, it can have negative consequences. By
making imports more expensive, for example, it protects domestic industries who may then become less
efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate
1
demand, which can lead to inflation.
Examples of Devaluation:
The devaluation of currencies arises in many situations, but comes about due to specific government action.
For example, Egypt has faced constant pressure from a black market for U.S. dollars (USD). The rise of the
black market came about due to a foreign currency shortage that hurt domestic businesses and discouraged
investments within the economy. To stop the black market activity, the central bank devalued the Egyptian
pound in March 2016 by 14% when compared to the USD.
The Egyptian stock market responded favorably when the currency was devalued. However, the black
market responded by depreciating the exchange rate of USD to the Egyptian pound, forcing the central bank
to take further action. As of July 12, 2016, it's expected that the central bank will devalue its currency again.
The stock market reacted favorably to the news, rallying on July 12, and subsequently declining slightly on
1
https://www.indexologyblog.com/2015/08/26/chinas-currency-devaluation-
7
2
July 13 when bankers said that no devaluation would occur for the week.
Using another example, China has been accused of practicing a quiet devaluation of its currency in 2016 to
prepare for the results of the presidential elections in November 2016. This is due to the fact that both
candidates, Hillary Clinton and Donald Trump, have spoken out against China. It would do well for the
country to strengthen the Yuan versus the USD to repair economic relationships with the United States.
Some believe that the country is secretly devaluing its currency so that it can revalue it after the November
3
election, making it look like it is cooperating.
2
http://www.panaceawebtechnologies. com/content/Yuan%20Devaluation.pdf
3
http://articles.economictimes.indiatimes.com/2015-08
8
CHAPTER THREE: CAUSES AND EFFECTS OF DEVALUATION
Devaluation and revaluation are official changes in the value of a country's currency relative to other
currencies under the phenomenon of fixed exchange rate. Whereas in floating exchange rate system,
currency appreciation or depreciation result as changes in market forces.
When a government devalues its currency, it is often because the interaction of market forces and policy
decisions has made the currency's fixed exchange rate indefensible. In order to sustain a fixed exchange rate,
a country must have sufficient foreign exchange reserves (often dollars) and be willing to spend them, to
purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to
do so, then it must devalue its currency to a level that it is able and willing to support with its foreign
4
exchange reserves.
When a central bank announces a loosening in its monetary stance, this leads to a quick response by the
participants in the foreign exchange market through selling the domestic currency in favor of other
currencies, thereby leading to domestic currency depreciation. In response to this, various producers now
find it more attractive to boost their exports.
There are two implications of devaluation. First, devaluation makes the country's exports relatively less
expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for
domestic consumers, which discourages the imports. It decreases the trade deficit and may increase trade
competitiveness of the economy. A government might use devaluation to boost aggregate demand in the
5
economy in an effort to fight unemployment.
Depending on consumer and producer responsiveness to price changes (known as supply and demand
elasticities), an effective devaluation should reduce a nation's imports and raise world demand for its exports.
Improvement in a country's balance of trade will cause an increase in the new inflow of foreign currency;
this, in turn, may help strengthen a country's overall balance of payments account. The total effect of a
4
http://profit.ndtv.com/news/economy/article-currency-war-how-yuans-devaluation-will-impactindian-economy-
1206553
5
http://profit.ndtv.com/news/economy/article-currency-war-how-yuans-devaluation-will-impactindian-economy-
1206553
9
currency devaluation depends on the actual elasticities of the supply and demand for traded goods. The more
elastic the demand for imports and exports, the greater the effect of the devaluation will be on the country's
trade deficits and, therefore, on its balance of payments; the less elastic the demand, the greater the necessary
devaluation will be to eliminate a given imbalance.
Devaluation often is criticized as an inflationary monetary policy because it raises the domestic price of
imports. The underlying cause of inflation is not devaluation, however, but rather excess money creation.
Nonetheless, devaluation is an unpopular policy, especially in small countries that are extremely dependent
on imports as a source of food and other necessities.
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic
products, devaluation can aggravate inflation. If this happens, the government may have to raise interest
6
rates to control inflation, but at the cost of slower economic growth.
Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic
weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor
confidence in the country's economy and hurt the country's ability to secure foreign investment.
Another possible consequence is a round of successive devaluations. For instance, trading partners may
become concerned that devaluation might negatively affect their own export industries. Neighboring
countries might devalue their own currencies to offset the effects of their trading partner's devaluation. Such
"beggar thy neighbor" policies tend to exacerbate economic difficulties by creating instability in broader
financial markets. Devaluation give rise to inflationary pressure because of which, imported good become
more expensive both to the direct consumer and to domestic producer using them for further processing.
6
http://www.business-standard.com/ article/international/five-indian-sectors-
10
CHAPTER FOUR: REASON FOR DEVALUATION OF YUAN BY CHINA
Donald Trump may very well have a field day with today’s currency news, as analysts predict. But he
shouldn’t.
Today China’s central bank devalued the country’s currency, the renminbi, by about 2% against the U.S.
dollar. It was the biggest one-day move since the renminbi, or yuan, officially de-pegged from the U.S.
dollar in 2005. The yuan maintains a close relationship with the dollar and trades 2% in each direction from
a midpoint selected by China. Today, that midpoint went from 6.11 yuan per U.S. dollar to 6.22.
Trump and others may say China is purposely devaluing its currency to help exports. After all, its economy
is struggling to hit the government 7% growth target.
But is that what’s really going on?
For the most part, China has recently actually wanted its currency to stead ily rise, for political reasons and
to keep capital from flowing out of China. China’s domestic and international goals align with a stronger
yuan. That helps explain why presidential candidates like Trump haven ’t been spouting off about China’s
currency management as much of late.
The answer to why China’s government devalued its currency Tuesday probably has more to do with the
dynamics of global currency markets than a sudden urge to help Chinese exporters make their goods cheaper
7
on the world market.
First, the yuan is strongly related to the dollar because China still manages the exchange rate within a range
against the dollar. When the U.S. dollar rises rapidly against world currencies, like it has in the past year to
pull almost even with the euro, the yuan also rises against China’s trading partners’
7
https://www.indexologyblog.com/2015/08/26/chinas-currency-devaluation-and-itsimpact-on-the-indian-stock-
markets/
11
currencies.
China has wanted the yuan to steadily rise against trade-weighted partners for a while. To keep that
appreciation gradual, as the dollar rockets upwards, it may have to devalue a little, says Jonathan Anderson,
at Emerging Advisors Group, one of the clearest observers of China ’s markets. “But this is not the same as a
“competitive devaluation” of the renminbi —and there’s nothing like that on the cards,” he wrote today.
“All China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson
continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require,
say, a 20% to 40% devaluation against the dollar. ”
If China had devalued the yuan by, say, 20%, it would clearly be an effort to boost exports for its advantage.
A 2% devaluation is different: it simply keeps the yuan a little more in line with trading partners ’ currencies,
which have lost value relative to the U.S. dollar. (For more on the U.S. dollar’s rise, read this recent Fortune
piece.)
As mentioned, China actually wants a stronger currency. As recently as April, it was actively trying to
strengthen the yuan, the Wall Street Journal reported. The country’s central bank purchased the yuan in the
currency markets and sold U.S. dollar holdings, a move aimed at stemming capital outflows from China as
8
the yuan was falling.
As Chen Long of Gavekal Dragonomics in Hong Kong recently explained, China has twin (and sometimes
competing) goals for exchange rates. On the domestic front, it wants to help exporters with a cheaper
currency, but it also wants to maintain a strong currency to prevent capital outflows that may weaken the
country’s economy further. On the international side, China wants to avoid a trade war with the U.S., which
it would have if it severely weakened the currency. It also wants to boost international
8
markets/
12
use of the yuan for political purposes, as China asserts itself more strongly around the world. The country’s
recent campaign to have the yuan join the mostly meaningless IMF reserve currency is one example of
China desiring a strong currency. In the end, these multiple goals again promote a slightly stronger currency.
China’s central bank said Tuesday’s yuan depreciation was a way to make the country’s financial system
more market-oriented. The bank said market spot prices would now determine the daily position, implying
that the central bank would step in less to influence it. Over the past few months the yuan-dollar spot price
had been lower than the exchange rate, and it became clear the central bank was supporting a stronger yuan.
There are reasons the government doesn’t deserve the benefit of the doubt when it says it’s in the business of
market-based approaches. President Xi Jinping’s administration said the same thing before pledging around
$800 billion in government money last month to prop up the falling stock market. China’s words and actions
don’t always match.
But there are also reasons that today’s devaluation shouldn’t only be viewed through the prism of trade.
First, other exporters in Asia, including South Korea and Taiwan, are hurting because of weak demand
abroad. Sluggish economies in Europe and the U.S. influence China ’s exports. That’s is not all solved by
currency devaluations. Second, China can use other mechanisms to boost its economy. Internet rates and
bank reserve requirements can still be cut considerably, and analysts expect that to happen. More
government spending is already in the works: China’s banks will issue 1 trillion yuan worth of bonds for
9
infrastructure spending, according to recent reports.
For now, it’s too early to say China is starting a currency war, even if that may be the West ’s first
inclination.
9
markets/
13
CHAPTER FIVE: IMPACT OF YUAN DEVALUATION ON INDIAN ECONOMY
China’s decision to devalue its national currency, the China yuan renminbi or yuan for short, in August 2015
took the global financial markets by surprise. By engineering a 4% drop in the yuan over two days, the
People’s Bank of China (PBOC) sent most other currencies reeling, including the Indian rupee, which sank
to a two-year low against the U.S. dollar.
China’s decision to devalue its currency for the first time in more than two decades came in response to a
slowing domestic economy. China’s gross domestic product (GDP) expanded 7.3% in 2014, the slowest rate
in 24 years. Growth is expected to slow again in 2015 and remain below the 7% mark for the foreseeable
future as Beijing attempts to restructure the Chinese economy away from export dependence and toward
consumption. The currency devaluation was one of many monetary policy tools the PBOC employed in
2015, including interest rate cuts and tighter financial market regulation.
Although the PBOC described the yuan devaluation as a “one-off depreciation” after a series of poor
economic data, the decision sparked fears about a global currency war between China and the West. For
10
India, a weaker Chinese currency has several implications.
China’s decision to let the yuan fall against the dollar raised the specter of more depreciation in the near
future. As a result, demand for the U.S. dollar surged around the globe, including in India, where investors
bought into the safety of the greenback at the expense of the rupee. The Indian currency immediately
plunged to a two-year low against the dollar and remained low throughout the latter half of 2015. The dollar-
to-rupee exchange rate referenced by the global currency markets has strengthened more than 5% since mid-
August. The threat of greater emerging market risk-off as a result of the yuan devaluation led to increased
volatility in Indian bond markets, which triggered additional weakness for the rupee.
India’s export sector has been hit hard in 2015 by the global economic slowdown. The slowdown in China,
which is among the top-five destinations for Indian products, is also weighing on Indian exporters. Normally
a declining rupee would aid domestic manufacturers by making their products more affordable for
international buyers. However, in the context of a weaker yuan and slowing demand in China, a more
10 http://financialxpert.blogspot.in/2015/08/ healing-wounded-dragon-while-lion-is-on.html
14
competitive rupee is unlikely to offset weaker demand. Additionally, China and India compete in a number
of industries, including textiles, apparels, chemicals and metals. A weaker yuan means more competition and
lower margins for Indian exporters; it also means Chinese producers will be able to dump goods into the
Indian market, thereby undercutting domestic manufacturers. India has already seen its trade deficit with
China nearly double between 2008-2009 and 2014-2015.
• High volatility in Rupee - The devaluation of Yuan strengthened US Dollar and mounted pressure on other
currencies, including Rupee to depreciate. Rupee has been depreciated @ 4.22% against US Dollar
and the following would be observed if the same trend continues: the imports would be costlier, increase in
inflation, increased interest rates, increase trade deficit, sluggish economy with decreased industrial output
and further increase the current account deficits.
• India from import Angle - India solely imports 80% of its crude oil requirements, and a weaker Rupee
would mean that oil companies will have to hike petrol and diesel prices. Costlier transport fuel will knock
up prices of most goods and stoke inflation. All imports right from raw material to finished goods would turn
costlier and squeeze profit margins. This may prompt companies to raise prices of consumer goods such as
cars and TVs.
• Selling spree of FIIs – FIIs (Foreign Institutional Investors) have invested billions of Dollars in Indian
stock market. Their returns are negatively impacted due to falling Rupee and squeeze in profits of Indian
companies. Compared to large stock markets like in U.S., Indian stocks can fall drastically even if FIIs sell
stocks worth few billion and repatriate the funds.
• Impact of Inflation on interest rates – Expensive imports would lead to inflation and that force Reserve
Bank of India (RBI) to hold on to high interest rates, which hampers ongoing economic recovery.
• Impact on Dollar denominated loans of Indian Companies Falling Rupee is bad for those companies that
11
have Dollar denominated as repaying loans will become costlier.
• India Vs China - China and India compete for several common export items such as textiles, gems and
15
jewellery, etc. and China would gain an advantage over India with a devalued Yuan. Imports from China
mounted to $60 billion in 2014-15, compared with a year ago, while exports from India plunged to $12
billion, leading to a huge trade gap between the two countries.
•
Declining Exports - India and China are competitors in several export items like Textiles, Metals,
Consumables, Gems & Jewelry as well as E-commerce sector. As China would export the product at low
cost by taking the advantage of devaluation India could not do that as it was price sensitive but not
competitive. This way China get competitive price advantage and could take away the export share of India.
The economic slowdown in China - which is among the top five countries for Indian exports - is another
negative for Indian exporters, analysts say.
•
Dumping of Chinese Goods - The Indian manufacturers would have the threat of China dumping goods
into Indian market. By taking the advantage of devalued Yuan the China could dump the goods into India
and sell them at the price that would be less than the cost of production by Indian manufacturers. As Imports
from China increased to $60 Billion in 2014-15 compared with year ago, while exports from India to China
12
plunged to $12 Billion, leading to a huge trade gap between the two countries.
16
CHAPTER SIX: IMPACT OF CHINA’S YUAN DEVALUATION ON INDIAN

INDUSTRY
• Textiles Industry: The biggest sector in which India competes with China is textiles. Though China is
moving on to high end textiles, there is still an inherited lower end segment where Indian companies could
face competition on account of devaluation. Since margins are the smallest in the lower end of the textile
segment, a devaluation of Yuan would eat away the profits of some textile companies in India.
• Chemicals Industry: India and China are major producers of both organic and inorganic chemicals. The
margins in complex chemicals are higher, whereas base chemicals attract lower margins. China lowering its
prices will impact Indian players who were already affected by crude oil prices.
• Metals Industry: Indian and global metal producers are impacted by a surge in Chinese exports. China is
already facing a number of legal cases for selling its products at lower than cost price in many countries.
Indian steel players have faced the burden of the attack from Chinese imports. The recent hike in import duty
would be nullified by the Yuan’s depreciation.
•
Electrical Consumables: Most of the electrical consumables in India are imported from China. These can
get cheaper in the coming days. But Indian companies generally do not pass on the benefit but pocket the
difference. Companies who are importing their components or the entire equipment are clear gainers from
China’s move.
•
Goods sold by E-commerce: Mobiles, laptops, garments, toys and most of the goods that are sold by e-
commerce companies are largely imported from China. They are the ones who will not be complaining about
the fall in Chinese currency. One can expect some more mega- sale promotions being announced by e-
13
commerce players in the days to come.
13 http://www.panaceawebtechnologies.com/content/Yuan%20Devaluation.pdf
17
CHAPTER SEVEN: DATA ANALYSIS
The current study is purely based on secondary data. The data for the aforementioned stock indices is
available at the corresponding stock exchanges used in the study. The methodology of the study primarily
includes analyzing trend movements in addition to doing correlation, descriptive statistics, and finding
kurtosis and skewness during the devaluation of Yuan.
A. Reasons for Devaluation of Yuan by China
 To help slumping GDP growth by boosting Exports: Chinese economy is struggling to meet the
targeted 7% growth in GDP as against current 6.8%. Earlier the GDP of China was growing at
double digit.
 Expand role in Global Financial System: A decade- long boom has turned China into the world’s
second largest economy. Inspite being the second largest economy by trade its role was limited in
the Global Financial System.
 To strengthen itself in Global Currency Politics: China is pushing itself to build up its presence
across the globe by joining the exclusive club of the International Monetary Fund ’s basket of
“Special Drawing Rights” (SDR), reserve currencies.
B. Impact of Yuan Devaluation on Indian Economy
 High volatility in Rupee - The devaluation of Yuan strengthened US Dollar and mounted pressure
on other currencies, including Rupee to depreciate. Rupee has been depreciated @ 4.22% against
US Dollar and the following would be observed if the same trend continues: the imports would be
costlier, increase in inflation, increased interest rates, increase trade deficit, sluggish economy
with decreased industrial output and further increase the current account
18
deficit.
 India from import Angle - India solely imports 80% of its crude oil requirements, and a weaker
Rupee would mean that oil companies will have to hike petrol and diesel prices. Costlier transport
fuel will knock up prices of most goods and stoke inflation. All imports right from raw material to
finished goods would turn costlier and squeeze profit margins. This may prompt companies to
raise prices of consumer goods such as cars and TVs.
 Selling spree of FIIs – FIIs (Foreign Institutional Investors) have invested billions of Dollars in
Indian stock market. Their returns are negatively impacted due to falling Rupee and squeeze in
profits of Indian companies. Compared to large stock markets like in U.S., Indian stocks can fall
drastically even if FIIs sell stocks worth few billion and repatriate the funds.
 Impact of Inflation on interest rates – Expensive imports would lead to inflation and that force
Reserve Bank of India (RBI) to hold on to high interest rates, which hampers ongoing economic
recovery.
 Impact on Dollar denominated loans of Indian CompaniesFalling Rupee is bad for those
companies that have Dollardenominated as repaying loans will become costlier.
 India Vs China - China and India compete for several common export items such as textiles,
gems and jewellery, etc. and China would gain an advantage over India with a devalued Yuan.
Imports from China mounted to $60 billion in 2014-15, compared with a year ago, while exports
from India plunged to $12 billion, leading to a huge trade gap between the two countries.
 Declining Exports - India and China are competitors in several export items like Textiles, Metals,
Consumables, Gems & Jewellery as well as E-commerce sector. As China would export the
product at low cost by taking the advantage of devaluation India could not do that as it was price
sensitive but not competitive. This way China get competitive price advantage and could take
19
away the export share of India. The economic slowdown in China - which is among the top five
countries for Indian exports - is another negative for Indian exporters, analysts say.
 Dumping of Chinese Goods - The Indian manufacturers would have the threat of China dumping
goods into Indian market. By taking the advantage of devalued Yuan the China could dump the
goods into India and sell them at the price that would be less than the cost of production by Indian
manufacturers. As Imports from China increased to $60 Billion in 2014-15 compared with year
ago, while exports from India to China plunged to $12 Billion, leading to a huge trade gap
between the two countries.
 Mounting Pressure on Central Banks - Devaluation of Yuan has strengthened U.S. Dollar against
many currencies by mounting pressure on RBI too to devalue its currency, followed by FED not
hiking the rate, decreasing of interest rates by many countries Apex banks to ease in doing
business. This inturn throwing the economies into deflation.
C. Impact of China’s Yuan on devaluation on Indian Industry
• Textiles Industry:The biggest sector in which India competes with China is textiles. Though China
is moving on to highend textiles, there is still an inherited lower end segment where Indian companies
could face competition on account of devaluation. Since margins are the smallest in the lower end of the
textile segment, a devaluation of Yuan would eat away the profits of so me textile companies in India.
• Chemicals Industry: India and China are major producers of both organic and inorganic chemicals.
The margins in complex chemicals are higher, whereas base chemicals attract lower margins. China
lowering its prices will impact Indian players who were already affected by crude oil prices.
• Metals Industry: Indian and global metal producers are impacted by a surge in Chinese exports.
China is already facing a number of legal cases for selling its products at lower than cost price in
20
many countries. Indian steel players have faced the burden of the attack from Chinese imports. The
recent hike in import duty would be nullified by the Yuan ’s depreciation.
• Electrical Consumables:Most of the electrical consumables in India are imported from China.
These can get cheaper in the coming days. But Indian companies generally do not pass on the
benefit but pocket the difference. Companies who are importing their components or the entire
equipment are clear gainers from China’s move.
• Goods sold by E-commerce:Mobiles, laptops, garments, toys and most of the goods that are sold by e-
commerce companies are largely imported from China. They are the ones who will not be complaining
about the fall in Chinese currency. One can expect some more mega- sale promotions being announced
by e-commerce players in the days to come.
In the following section, the study looks at analyzing the response of global indices with respect to
Shanghai Composite Index by using Descriptive statistics with devaluation of Yuan.
The following table summarizes the descriptive statistics of the concerned indices:
Table: Descriptive Statistics of Select indices with devaluation of Yuan
Looking at the above statistics, it is clearly evident that the S&P 500 index has resulted in balanced
returns (2055) with less risk (67.75) surpassing all the counterparts. Further, FTSE 100, Shanghai and
BSE Sensex proved to be next best indices ranking next to S&P 500.
21
The Kurtosis values of the concerned indices are saying that all are Platykurtic i.e. being less than 3 in
value. The returns distribution of all these indices is less clustered around the mean. Hence, the
Platykurtic returns will have fewer large fluctuations than the returns displaying normal or leptokurtic
distributions.
All the indices are negatively skewed except Shanghai Composite that is positively skewed.
Table: Correlation Analysis of Select Indices
It is clearly evident from the above results that the Shanghai Composite index is showing high
correlation with the Hang Seng (93%) followed by Bovespa (84%), FTSE 100 (82%) , Nikkie (70%),
S&P (69%) and Sensex (32%) viz. Shanghai is showing positive correlation with almost all its
counterparts indicating that the movement of one market index influence the other po sitively in the same
direction. Hence with the devaluation of Yuan all the indices were affected worse.
22
CHAPTER EIGHT:CONCLUSION
As the barrier of boundaries started dissolving with respect to investments, as the pattern of
holdings of portfolio investment is jumping between the counterparts by Foreign Institutional
Investors (FIIs). Also, during the post devaluation of Yuan, all the markets started showing
negative returns indicating the integration of markets and their connectivity. In fact, this move
came as a blow to the Indian export market given the situation that the markets have already
been going week in the recent past due to the recessionary conditions in the global arena!
It is clearly evident from the above results that the Shanghai Composite index is showing high
correlation with the Hang Seng (93%) followed by Bovespa (84%), FTSE 100 (82%) , Nikkie
(70%), S&P (69%) and Sensex (32%) viz. Shanghai is showing positive correlation with almost
all its counterparts indicating that the movement of one market index influence the other
positively in the same direction. Hence with the devaluation of Yuan all the markets across the
globe have affected adversely during this period and across the globe the markets lost billions of
dollars.
Further, the descriptive statistics, of S&P 500 index has resulted in balanced returns (2055) with
less risk (67.75) surpassing all the counterparts. Further, FTSE 100, Shanghai and BSE Sensex
proved to be next best indices ranking next to S&P 500.
The Kurtosis values of the concerned indices are saying that all are Platykurtic as the returns
distribution of all these indices is less clustered around the mean indicating that no single index
has yielded abnormal returns. All the indices are negatively skewed except Shanghai Composite
that is positively skewed. Thus it is clearly evident that the select global market indices are
integrated with each other, and more specifically Sensex is more integrated with other Asian
exchanges. This can be very well noticed in the period of devaluation which has affected the
entire globe and sending strong indications that the markets are well Knitted by way of
automation and they move in accordance with other markets and if one market affects adversely
the ripples and waves will be sent to other markets.
23
BIBLIOGRAPHY
BOOKS:
 Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson

Prentice Hall
 Carbaugh, Robert (2006). Contemporary Economics: An Applications Approach.

Cengage Learning
 Principles of Economics, 3rd ed., Prentice Hall Englewood Cliffs, New Jersey
 MANAGERIAL ECONOMICS BY SUMA DAMODARAN
 Managerial Economics: Principles and Worldwide Application by Dominick Salvatore
WEBSITES:
1. http://financialxpert.blogspot.in/2015/08/ healing-wounded-dragon-while-lion-is-on.html
2. https://www.indexologyblog.com/2015/08/26/chinas-currency-devaluation-and-
itsimpact-on-the-indian-stock-markets/
3. http://profit.ndtv.com/news/economy/ article-currency-war-how-yuans-devaluation-will-
impactindian-economy-1206553
4. http://profit.ndtv.com/news/economy/ article-currency-war-how-yuans-devaluation-will-
impactindian-economy-1206553
5. http://articles.economictimes.indiatimes. com/2015-08-11/news/65452912_1_midpoint-
yuanmecklai-financial-services
6. : http://www.business-standard.com/ article/international/five-indian-sectors-that-will-
beimpacted-by-china-s-yuan-devaluation-115081100809_1. Html
7. http://www.panaceawebtechnologies.com/content/Yuan%20Devaluation.pdf
24

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EFFECT OF CHINESE DECISIONS OF DEVALUATION ON INDIAN STOCK

MARKET – CRITICAL APPRECIATION

CHANAKYA NATIONAL LAW

TOPIC- EFFECT OF CHINESE DECISIONS OF DEVALUATION ON

SUBMITTED TO: DR. MANOJ MISHRA

I owe the present accomplishment of my project to my friends, who helped me

DECLARATION BY THE CANDIDATE

INDIAN STOCK MARKET – CRITICAL APPRECIATION” submitted

(Signature of the Candidate)

Chanakya National Law University, Patna

AIMS AND OBJECTIVES

The method of writing followed in the course of this research project is

AIMS AND OBJECTIVES 4

CHAPTER 2: DEFINITION OF DEVALUATION 7-8

CHAPTER 3: CAUSES AND EFFECTS OF DEVALUATION 9-10

CHAPTER 4: REASON FOR DEVALUATION OF YUAN BY CHINA 11-13

CHAPTER 5: IMPACT OF YUAN DEVALUATION ON INDIAN ECONOMY

CHAPTER 6: IMPACT OF YUAN DEVALUATION ON INDIAN INDUSTRIES

CHAPTER 7: DATA ANALYSIS 18-22

CHAPTER ONE: INTRODUCTION

CHAPTER TWO : DEFINITION OF DEVALUATION

CHAPTER THREE: CAUSES AND EFFECTS OF DEVALUATION

CHAPTER FOUR: REASON FOR DEVALUATION OF YUAN BY CHINA

But is that what’s really going on?

CHAPTER FIVE: IMPACT OF YUAN DEVALUATION ON INDIAN ECONOMY

CHAPTER SIX: IMPACT OF CHINA’S YUAN DEVALUATION ON INDIAN

CHAPTER SEVEN: DATA ANALYSIS

A. Reasons for Devaluation of Yuan by China

B. Impact of Yuan Devaluation on Indian Economy

C. Impact of China’s Yuan on devaluation on Indian Industry

Table: Descriptive Statistics of Select indices with devaluation of Yuan

Table: Correlation Analysis of Select Indices

 Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson

 Carbaugh, Robert (2006). Contemporary Economics: An Applications Approach.

 MANAGERIAL ECONOMICS BY SUMA DAMODARAN

 Managerial Economics: Principles and Worldwide Application by Dominick Salvatore

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