The author of this article says "[the devaluation of the yuan] may also have impact on [foreign direct investment (FDI)] if China becomes a more attractive destination vis-a-vis India". Why is this?

I understand that the following sentence then says "investors would go there where with the exchange rate he will get more kick for his dollar", but what makes China a more attractive destination for FDI than India following the devaluation of the yuan?


A depreciation in the Yuan will result in an increase of Chinese exports as where countries compete on price for goods like steel and tires the demand is very elastic. A small change in price will lead to a large shift in the quantity demanded. India knows this and after a succession of poor last few months exports will stand to lose out even more now that the Yuan has devalued.

Also now that China has changed its exchange rate, China could be leaning to a more flexible exchange rate (which the article suggests) opening up for an increase in capital mobility which investors look favourably upon. The devaluation of the yuan has also decreased the price of Chinese assets thus making it cheaper to invest.

It is likely that the further reduction of the price of Chinese exports will cause the currency to appreciate once again as demand for Chinese goods increases. Some investors will take on Chinese assets and currency, predicting the currency will appreciate in the future, resulting in a nice profit.

Finally as India's export reliant sectors struggle to compete with supplying major industries around the world, the drop in market share will be swallowed up by China resulting in more attractive Chinese businesses (which may be open to FDI). India is also struggling to supply its domestic industries as it cannot compete on prices. This uncertainty around India and its lacklustre performance will likely see FDI being pulled out and reinvested into more lucrative opportunities.

  • $\begingroup$ Why would reduction in the price of Chinese exports will cause the currency to appreciate? It seems like you are arguing that low prices today will cause higher prices tomorrow which is not generally true.. $\endgroup$ – BKay Oct 20 '15 at 9:13
  • $\begingroup$ True, it it more of a general economics argument but may not necessarily be the case when it comes to China and its commitment to controlling its currency. Normally under flexible exchange rate conditions a surge in demand for a countries exports will result in the currency appreciating as people need to purchase the foreign currency before they can purchase the goods (many hands chasing after limited goods) this would reduce the money supply of said currency and cause its value to appreciate. $\endgroup$ – Anonan Oct 20 '15 at 10:38
  • $\begingroup$ However, what I was trying to say was that investors will only invest if there is confidence in the country. Normally, a depreciation would be seen as a negative and cause capital flight as it shows signs of a weakening country. In China’s case there seems to be an ulterior motive for the depreciation and something that investors believe may give them a good return on their investment. China wishes to increase its exports whilst preventing capital flight all for its goal of economic growth. $\endgroup$ – Anonan Oct 20 '15 at 10:38

Here's my take:

From your article «its[India's] overseas shipments had contracted for the seventh consecutive month in June its industries like steel and tyres are reeling under cheaper Chinese imports.» If the Chinese companies gain more market, they become more desirable, specially when the yuan suffers a devaluation, because with the same amount of dollars you can buy more of companies that are expanding.


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