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Bizness Chinese%20trade

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  1. 1. Business Read on ................................... Chinese Trade Will the revaluation of the yuan change anything? KenSource The Chinese were great Political point-scoring: The 2% China knows that it is too big now. It traders once upon a time. move was more political and less cannot be pushed around. In the end, it They have regained those economic. It has suddenly reduced the revalued its currency when it wanted skills all over again. After tension between China and the US. to, and to the extent it was comfortable making the whole world Many key US politicians were accusing with. The pressure on China to revalue guess about when and how China of currency manipulation and will also be less from Americans in the threatened to retaliate. It was future, now that the Chinese have much the Renminbi (or Yuan) increasingly getting ugly after two years shrewdly decided to peg it against a would appreciate, China of rising drumbeat of protests and basket of currencies. announced that it would be charges. Serious trade sanctions were just 2% and that the yuan China’s Focus: China’s priority is being talked of. Section 295 of the China would be delinked from the local social stability. Currency flexibility Currency Bill, sponsored by US Senators dollar and pegged to a basket is a secondary concern. The Chinese Schumer and Graham, wanted a 27.5% of currencies as Singapore leadership has so far shown that it is adjustment to yuan. The bill had has done. China's move is totally focused on domestic growth, and generated huge bipartisan support in the far-reaching, killing several that goal is never subservient to US Congress. birds with one stone. What currency flexibility. China still has 300 are the implications? Indeed, if China had not changed its million surplus workers and a huge policy by October 15, the next scheduled number of rural poor. So, it faces huge release date for the US Treasury’s bi- challenges. It can do without currency annual foreign volatility, exchange review, especially after it Washington would witnessed the have formally meltdown in declared China Southeast Asia guilty of currency that devastated manipulation, and their economies. anti-China trade China is more legislation would focused on have been passed. domestic demand, With 2% reforms, foreign appreciation, the investment, pressure is off. It exports and also proves that Renminbi employment 38 Advanc'edge MBA September 2005
  2. 2. Business Read on ................................... 64% of the world’s total foreign exchange reserves in early 2005. A lot of currency diversification is possible. This may have serious implications for the dollar. The bid for dollar- denominated assets will be removed. With it will go the subsidy that Asians have provided to US interest rates. Will this lead to a rise in interest rates? In that case what will it do to the US property markets and asset-dependent US consumers? What will it do to US consumption? The Great China Wall Losing Trade: For over two years, a huge amount of money has been flowing generation. With the currency issue out much less now. This is part of a into China, in the hope of a revaluation. of the way it can now focus on these continuing focus on other Asian central According to Morgan Stanley, this hot goals without distraction. What many banks to reduce their overweight money inflow amounted to almost $350 people do not notice is that, despite position in dollars. The Bank of Korea, billion, coming mainly from Chinese scorching growth, unemployment is Bank Negra Malaysia and the Reserve overseas. Besides, numerous hedge rising, both in official numbers and in Bank of India have all openly spoken of funds bought the Chinese currency in the unofficial estimates. Despite a 9.5 moving away from the dollar. Malaysia offshore market at a substantial percent growth rate, China just cannot quickly dismantled its peg in favour of a premium and the money made its way create enough new jobs for its growing basket system immediately after China into China via export companies which population as it modernizes the announced its revaluation. The move can were over-invoicing exports, diverting agricultural sector. go a long way. The Bank for the rest of the money to these International Settlements estimates that Trade Deficit: There will be no speculators. The opportunity cost of this Asian reserves (including Japan) were change in the US trade deficit with money for two years is at least 8% (two $2.4 trillion as of February 2005, 64% China. China has huge surplus capacities years of yield on US treasury), while the of the world total. The dollar- and labour, and is so desperate to keep actual cost may be even higher. The denominated assets accounted for about its economy humming at high levels of appreciation barely pays for the cost of growth that its exporters will simply carrying the revaluation trade. Most reduce its prices by 2% and by further speculators have actually lost money. devaluation so as to protect their Once it is in a basket, the yuan may exports. The trade deficit will get gently appreciate. In India, in the ‘80s, corrected only when the US the rupee was allowed to gently consumption goes down, probably with depreciate, say by 5% a year within a a fall in property prices and rise in maximum band of 0.37% a day. It will interest rates. It has nothing to do with effectively kill speculative carry trade currency value. focused on the yuan. A new game has Fate of the Dollar: By abandoning begun in which global exports, currency its peg, China is sending a clear signal values and interest rates will be that its demand for dollar assets will be Shanghai subjected to more uncertainties. September 2005 Advanc'edge MBA 39

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