No longer the principal engine for global growth, China is seeking to regain its export momentum and stabilise growth of its economy with a cheaper yuan after its exports fell by 8.3 per cent in July but in the process it has thrown into jeopardy currency stability, exports and growth prospects for countries across the world.

India will be at the top of countries taking hits in a welter of uncertainties at a time the global economy and world trade have slowed down. India's export contraction has lasted seven months and runs a huge trade deficit with China. The latest devaluations place China in an even more competitive position while imports for it would be more expensive.

The rupee has depreciated further in the wake of China's devaluation which strengthens US dollar. But India exporting a wide range of products like textiles, chemicals, metals and consumable goods could become even more difficult in the face of cheaper Chinese exports to India's markets.

What is worse, the yuan, as the Chinese currency more popularly known, is expected to remain weak and volatile in the near term, though its central bank economists describe actions so far as 'one-off' technical correction, which should not be seen as the beginning of a devaluation trend. They underline China's commitment to maintain yuan stable at a 'reasonable' level and strengthening the role of market in determining currency rates.

The devaluation aims at reducing the spread between onshore and offshore rates. IMF has welcomed the new mechanism for determining the central parity of the Renminbi, as it should allow market forces to have a greater role in determining the exchange rate. 'The exact impact will depend on how the new mechanism is implemented in practice'.

IMF in a statement emphasised importance of greater exchange rate flexibility as China strives 'to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets'. The Fund believes China can aim to achieve an effectively floating exchange rate system within two to three years.

China has been pressing for inclusion of its currency in the SDR basket which now consists of US dollar, euro, yen and pound sterling. IMF has extended till September 2016 its review process for weightage and other criteria in fixing SDR rate. All that it has said at present is that a more market-determined exchange rate would facilitate SDR operations 'in case the Renminbi were included in the currency basket going forward.”

Chief Economic Advisor Arvind Subramanian sees the devaluation as one having more to do with China's growth and export slowdown though policy-makers around the world have to take note of it. He also saw it as 'a more plausible credible candidate for inclusion in the SDR (special drawing rights) basket.'

On the other hand, there is indignation in USA over China's devaluation which is seen as one likely to hurt American companies which would weigh on their sales of well-known brands to smaller businesses and could even threaten ongoing US economic recovery. Liberals and Conservatives alike have angrily reacted saying China was still playing games with its currency.

China's weakening of the yuan would cause the largest economy in the world to bear the burdens of an appreciating currency (dollar), according to investment analysts and asset managers. Some have gone to the extent of viewing it as one which could lead to US Federal Reserve deferring an interest rate increase now considered likely in September this year.

In a statement, the US Treasury Department said it would continue to monitor the exchange rate developments in China and hoped China would continue with its reforms aimed at rebalancing its economy shifting from exports to greater domestic consumption.“Any reversal in reforms would be a troubling development,” the department said.

China's spectacular moves are seen not only as aimed at stabilizing China's growth at 7 per cent this year and beyond if possible but also accelerating market-related exchange rate determination of its currency to qualify for inclusion in SDR basket in 2016 itself and gain the status of a global reserve asset.

A third dimension of China's latest exchange rate move, which comes ahead of President Xi Jingping’s visit to USA, may be to reinforce China's claims to be accorded global power status on par with the United States with which it has been seeking a 'special relationship' since the Chinese President assumed power in 2013. The global impact of China's devaluation only underlines how vital it is for reforming the global order including the international monetary system.

Also, the timing of devaluation would have ramifications not only political , with the Obama Administration under Congressional pressures to get tougher with China, but also economic, in that it could impact on the launching of the Trans-Pacific Trade Deal (TPT)that the President has negotiated with 11 Pacific countries, other than China. The President has still to overcome resistance to give him the authority to complete the deal.

Irrespective of TPT, China under President Xi has embarked on massive infrastructure projects and economic partnership and trade deals which would bring vast regions of the world under its influence. (IPA Service)