Rise in US-China trade tensions may result in the latter channelling its exports to emerging markets, as China had displayed such traits earlier and dumped its products at predatory rates in many markets, including India, disrupting demand-supply dynamics, especially for electronic goods, iron, steel and organic chemicals, said India Ratings and Research (Ind-Ra). A fall in Chinese exports to the United States could potentially put downward pressures on the Chinese yuan and a likely devaluation of the yuan could stimulate a competitive depreciation in the Indian rupee, failing which the competitiveness of Indian exports could be affected, the rating agency said. As Chinese exports accounted for about 18 per cent of the total US imports in 2018, representing 2.34 per cent of the US gross domestic product, lower imports or a rise in the cost of imported goods could stimulate inflationary pressures in the United States, Ind-Ra said in a press release. This could provide fillip to the US credit market yields, which in turn could push up discount rates and reduce the arbitrage opportunity for US investors, resulting in weaker foreign portfolio investment (FPI) flows to emerging markets, including India, it said. As highlighted in Ind-Ra’s FY20 Corporate & Capital Market Outlook, a continued shrinkage in the Chinese trade surplus is likely to transform China from an exporter of capital to a net importer of foreign capital. Therefore, Ind-Ra expects the combined effect of higher capital flows into China and a rise in inflation in the US to crowd out and impinge upon flows into EMs. Ind-Ra feels India is unlikely to benefit much from the ongoing trade frictions between the United States and China as there is a stark difference in the nature of commodities exported by India and China to the United States. Any slowdown in Chinese exports to the United States on account of the recent imposition of tariffs on Chinese goods could result in a commensurate rise in Chinese exports to other emerging markets. With Chinese industrial production continuing to grow at around 5 per cent and Chinese exports to the United States contracting persistently, over the last few years, Chinese exporters have started penetrating alternate markets. Hence, imports by other Asian emerging markets from China grew 20.70 per cent in 2018 versus 12.75 per cent in 2010. This has been catalysed by the Chinese manufacturers’ ability to undercut domestic manufacturers in these markets, resulting in lower market share for the domestic players in the emerging markets. Ind-Ra expects the contraction in Chinese trade flows to the United States to result in dumping of key commodities such as electronic and electrical components, steel, chemicals, plastic products and other intermediate goods. In particular, India’s share of imports from China in total imports of steel, polymer and capital goods could potentially increase as Chinese exports to the United States start losing traction. The impact could percolate through lower international prices, thereby putting pressure on domestic prices due to diversion of supply from China to other importing countries. The rating agency expects demand-supply dynamics in these sectors to get skewed unfavourably over the medium term.
