China's yuan devaluation good for India, emerging markets: SBI

MUMBAI: The recent 2.5% devaluation of the Chinese currency by its government could turn out to be a blessing in disguise for emerging markets, including India as an overvalued yuan, its currency, was an impediment to growth of several smaller economies, a report by SBI said.

"With the Chinese economy undergoing structural adjustment, the devaluation of the yuan was natural," the report by Soumya Kanti Ghosh, chief economic advisor, SBI noted. "Though this has caused financial turbulence, this might prove to be a blessing in disguise for India in the context of overvalued real effective exchange rate. Some estimates show that yuan was overvalued by more than 25%."

The report pointed out that academic estimates have shown a 10% nominal effective appreciation of the yuan would have brought down China's annual per capita growth by 0.86%, and so that a 30% appreciation, accumulated over the past five years may have chipped away about 2.5% from China's growth rate. "This reduction in China's growth has translated into a drop of GDP growth in poor countries and between China and the emerging markets being even higher, with one percentage point of growth translating into 0.66% growth. The weaker yuan would help make China's exports more competitive, which would likely to help boost the nation's economy and eventually prompt a recovery in economies from where China imports," the report pointed out. "These macroeconomic mechanics of growth constitutes a certain degree of growth optimism for China, and the world," it added.

State Bank of India