Revaluation of Chinese Yuan - Forex
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Revaluation of Chinese Yuan - Forex

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  • Big currency swings undesirable: China central bankThe yuan has since risen 0.8 percent against the dollar.
  • The revaluation debate began when the U.S. government had continued to urge China to revalue the Yuan from Yuan 8.28/$. They argued that the growing Chinese trade surplus with the U.S. indicated that the Yuan was significantly overvalued. The Chinese government did not think that same. They believe in accordance with the bilateral trade surplus with the U.S. was a result of competitiveness, cost of production, and changing global industry structures. On July 20, U.S. and Hong Kong were informed that China would alter its exchange regime from a dollar-peg to a managed float. Pegged exchange system Overvalued prior to 1994 Pegged to US dollar at a constant ratio of 8.3 since 1994 The pegging is believed to play a positive role in 1997-1998 Asian financial crisis. Significantly undervalued for the last several years Pegging is achieved through foreign exchange intervention Policy change in 2005With U.S. unemployment stuck near 10 percent, Obama faces pressure to persuade Beijing to allow the yuan to appreciate so as to help U.S. firms compete with Chinese goods.Many U.S. economists say the currency is undervalued by as much as 40 percent. They say that gives Chinese firms an unfair price advantage, takes jobs away from other countries and adds to global financial distortions.yuan's value represents an unfair subsidy that costs jobs in many countries"The renminbi exchange rate is not the main reason behind the U.S.-China trade deficit," Jiang told a regular briefing. "So naturally, renminbi appreciation is not the solution to rebalance Sino-U.S. trade.“
  • A weaker exchange rate makes exports more competitive and increases demand for Chinese exports. Chinese economic growth is dependent on exports, so the value of the currency plays a key role in boosting growth Problem of unemployment.
  • Do you believe that the revaluation of the Chinese Yuan was politically or economically motivated?Both politically and economically motivatedPolitical Reasoning:A move in order to reduce pressures growing between governments, while at the same time, the Chinese government wanted their economy and the Yuan to be a prominent role in the global economy, becoming equal with the US dollar, Japanese Yen, and Euro. Rapid growth of the country also played a role in the move to become a larger part of the global economy.Economical Reasoning:Has a lot to do with the rapid growth of the country.China is seen as relatively cheap in terms of manufacturingMany multinational companies have manufacturing operations set up within China, reaping the benefits of the cost of labour and production. The impact the revaluation had on the Chinese companies was potentially major over the long run.Companies would suffer a 2% increase in cost versus foreign market pricing immediately.The Yuan’s new freedom to float incrementally over time presented them with a new and growing operational risk from exchange rates over time.Political motivation seemed to play a larger part in the revaluation because the move would cause Chinese companies to have potentially major problems in the long run, so it does not seem plausible to make the move if their own companies are going to suffer. If the revaluation occurred, it would put China as one of the top major economies in the global economy, allowing them to not fall second to anyone.
  • Chinese multinationals would now be facing the same exchange rate-related risks borne by U.S., Japanese, and European multinationals. What impact do you believe this rising risk will have on the strategy and operations of Chinese companies in the near future?Chinese companies are primarily exporters, with the US being their biggest customer. With a fixed currency, Chinese exporters could produce and sell without conscience, not needing to worry about exchange rate risk. Although China’s currency did not switch to a complete float, their style of ‘managed’ float brought about new risk for Chinese businesses. In the near future, Chinese companies are forced to be cognizant of the exchange rate risk brought about by their managed float of 0.3%. Now, instead of being stable, their currency can fluctuate to a certain degree, making the value of the Yuan rise or fall depending on other economic factors. These fluctuations, if not monitored, could be troublesome for Chinese exporters. The cheaper the Yuan, relative to other currencies, means more goods exported from China. On the other side, if the Yuan rises, relatively, multinational firms may choose to purchase cheaper goods produced in other countries. In short, if not managed carefully, the fluctuations of the Yuan could result in a negative trade balance if the relative value of the Yuan remains high.
  • The US continues to argue that China is keeping its currency artificially undervalued, thus unfairly helping Chinese exporters. But what might a yuan revaluation mean for the world's markets?China has held the yuan in a de-facto peg to the dollar since the worsening of the global financial crisis in mid-2008, meaning its currency has weakened against those of other trade partners as the value of the dollar has slid over the past year.Yet long-standing tensions over China's trade surplus and monetary policy remain entrenched. China has repeatedly said that its currency policy has been an important source of stability during a period of international financial turmoil, benefiting both the Chinese and global economic recovery. During the most intense phase of the financial crisis, from September 2008 to March 2009, the dollar peg actually meant that the yuan appreciated strongly against virtually all other currencies in the world.China began a programme of increased yuan flexibility in July 2005 and steadily strengthened its value, from about 8.2 yuan to the dollar to around 6.8 by July 2008. But the yuan has been held at roughly that level ever since that time. If China discards the existing currency peg and allows market forces to dictate the yuan’s value, then the value of China’s holdings of US debt would decrease relative to the appreciation of the currently undervalued yuan. However, in the short term an appreciation of the yuan would also make it cheaper for China to buy US dollar-denominated commodities.In the longer term, the value of the yuan may find an equilibrium at a lower level since an appreciation would eventually weigh on Chinese exports and GDP growth. But in the interim stages, China may decide to leverage any strength in the value of a free-floating currency to buy commodities while they are relatively cheap. This hypothetical situation would continue to fuel a commodity rally. The biggest market risk factor for 2010 comes from the point at which this trend colours US-China relations.
  • All those dollar-based U.S. treasury bets they hold will be worth less in yuan termsChina’s banks still do limited business with the outside world, so the direct, immediate impact of a stronger yuan would be limited.Reuters An employee bundles yuan notes at a Chinese bank.Fu Lichun, an analyst at Southwest Securities, estimates that Industrial & Commercial Bank of China Ltd. would incur a foreign-exchange loss of as much as 200 million yuan if the yuan rose 1% against the dollar. By comparison, ICBC posted net profit of 129 billion yuan in 2009.
  • Chinese domestic commodity producers yuan-based costs will rise relative to the commodities they sell into dollar-based global commodity marketRead more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#loser-chinese-domestic-commodity-producers-4#ixzz0tQVIQlRG
  • Dirt cheap Chinese products Americans have enjoyed for years will start to be less cheap.Read more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#loser-us-consumers-8#ixzz0tQVmGJGp
  • Apple, which manufacturers many of its products in China, could see its costs rise a result of the yuan changealmost all apple products are designed in US and manufactured in China. Read more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#loser-apple-10#ixzz0tQVtu6aq
  • U.S. retailers like Wal Mart have benefited greatly from low-priced China-based suppliers.Read more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#loser-us-retailers-dependent-on-chinese-suppliers-15#ixzz0tQW93sjo
  • China's effective buying power has been increased relative to dollar-based global commodity prices. That's great news for nations that feed Chinese commodity demand, such as AustraliaRead more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#winner-commodity-exporters-down-under-3#ixzz0tQVCHyKU
  • Since U.S. goods are now cheaper in yuan value in China, U.S. exporters should benefit from being priced more competitivelyRead more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#winner-us-exporters-of-course-5#ixzz0tQVLsE5w
  • Cool international products will be cheaper for Chinese consumersRead more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#winner-chinese-consumers-7#ixzz0tQVfoMq3
  • The nouveau rich love to travel too, and international destinations won't be quite as expensive.Read more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#winner-waves-of-chinese-tourists-11#ixzz0tQVzFV00
  • Oil, priced in dollars on the global market and already subsidized in China, will be even cheaper for ChineseRead more: http://www.businessinsider.com/china-yuan-revaluation-winners-losers-2010-6#winner-oil-17#ixzz0tQWI45Rq

Revaluation of Chinese Yuan - Forex Revaluation of Chinese Yuan - Forex Presentation Transcript

  • Revaluation of Chinese Yuan
    1
    Revaluation of Chinese Yuan
  • 2
    Revaluation of Chinese Yuan
    Background
    U.S. government -
    Chinese trade surplus
  • Revaluation of Chinese Yuan
    3
    Why Yuan was undervalued
  • Revaluation of Chinese Yuan
    4
    Factor responsible for revaluation
  • Revaluation of Chinese Yuan
    5
    Impact on Chinese Companies
  • 6
    Revaluation of Chinese Yuan
    what might a yuan revaluation mean for the world's markets?
  • Winners And Losers From The Chinese Yuan Revaluation
    7
    Revaluation of Chinese Yuan
  • Loser: China's Central Bank
    8
    Revaluation of Chinese Yuan
  • Loser: Chinese domestic commodity producers
    Revaluation of Chinese Yuan
    9
  • Loser: U.S. consumers
    Revaluation of Chinese Yuan
    10
  • Loser: Apple
    11
    Revaluation of Chinese Yuan
  • Loser: U.S. retailers dependent on Chinese suppliers
    Revaluation of Chinese Yuan
    12
  • Winner: Commodity exporters Down Under
    13
    Revaluation of Chinese Yuan
  • Winner: U.S. exporters, of course
    Revaluation of Chinese Yuan
    14
  • Winner: Chinese consumers
    Revaluation of Chinese Yuan
    15
  • Winner: Waves of Chinese tourists
    Revaluation of Chinese Yuan
    16
  • Winner: Oil
    Revaluation of Chinese Yuan
    17
  • 18
    Revaluation of Chinese Yuan
    Bibliography
    www.ramakrishnavadlamudi.blogspot.com
    http://www.businessinsider.com/moneygame
    Chinese yuan revalued against dollar – Wikinews
    The yuan and global imbalances – The Economist
    http://economictimes.indiatimes.com/News/International-Business/articlelist/858478126.cms
    The Economic Times – Yuan revaluation
  • Thank You
    19
    Revaluation of Chinese Yuan