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Macroeconomics Update

China Economic Update

21st June, 2010

Facing growing pressure from around the world, The Peoples Bank of China announced on Saturday that
it is prepared to allow the country's currency to float more freely against the dollar and other foreign
currencies. The bank said that this step is in view of the recent economic situation and financial market
developments at home and abroad, and the balance of payments (BOP) situation in China

This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the
pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly
revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation
and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual
impact on Chinese economy

On one hand it would make the Chinese exports expensive for the world market and will benefit
exports from other competing countries like India, Brazil and other South East Asian economies

On the other it would make imports cheaper for China and will give the government a strong tool to
manage its inflation, increase the purchasing power of the people and resulting in more broad
based growth and in turn leading to the establishment of service sector in the country

All and all this move by China is good news for the global economy and other developing countries that
are unable to compete with China in terms of exports because of its week currency.

Indian Perspective

This will ease Indias trade deficit with China and will help Indian exports of textiles, leather products,
marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese
exports.

The trade between India and China soars closer to the US$60 billion target, Indias trade deficit with China
is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the
trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase
the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian
manufactures.

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Macroeconomics Update

Exhibit: Sectors/Companies Impact of Stronger Yuan


Sector Companies Impact Reason
Hindalco
Sterlite Stronger Yuan will lead to a slowdown in Chinese
Metals Sesa Goa Positive dumnping of Metal goods into India and give a level
Tata Steel playing field to Indian producers
SAIL
Maruti Suzuki Positive that export is likely to go up on account of Yuan
Auto Tata Motors Mix revaluation & negative that auto ancilliary parts,
M&M domestically will become costly
Bharat Forge
Exports and demand by domestic original equipment
Auto Ancillary BOSCH Positive
manufacturers (OEMS) is likely to go up
Motherson Sumi
Reliance Power
Power Adani Power Cost of production will go up, as companies will have to
Negative
Companies JSW Energy purchase equipment at competitive prices
Tata Power
BGR Energy
Bharat Bijlee Exports and demand by domestic power companies is
Power Ancillary Positive
EMCO likely to go up
Voltamp transformers
Bajaj Electrical
Consumer Lloyd Electrical Positive that exports & domestic sales will go up while
Mix
Goods Blue Star negative that raw material prices will soar up
Hitachi Home
Hindustan Construction
Cost of equipment is likley to go up, resulting in higher
Construction Nagarjuna Construction Negative
Capex and thus reduced cash flow
IVRCL Infrastructure
BHEL
L&T Exports and demand by domestic power and
Capital Goods Positive
Alstom Projects infrastructure companies is likely to go up
Areva T&D
Nilkamal
Stronger Yuan will lead to a slowdown in Chinese
VIP Industries
Plastics/Toys Positive dumnping of Plastic Materials into India and give a level
Supreme Industries
playing field to Indian producers
Hanung Toys
NuTek India Will Increase the demand by Indian telcom companies as
Telecom
Kavveri Telecom Mix for them the Chinese goods will become costly and
Equipments
Astra Microwave negative since there spare parts cost will increase
Bombay Rayon Fashion
Exports and demand by domestic original equipment
Textiles Century Textile Positive
manufacturers (OEMS) is likely to go up
Arvind Textile
Source: Kredent Research Advisors

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Macroeconomics Update

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