This document summarizes a presentation on the Chinese yuan currency. It introduces China's large population and status as the world's second largest economy. It then discusses the history of the yuan, including its peg to the US dollar from 1994 to 2005. In 2005, China switched to pegging the yuan to a basket of currencies and allowing it to float more freely. Since then, the yuan has appreciated by about 24% against the dollar. The document also notes political pressures on China to revalue its currency to reduce trade surpluses with countries like the US.

1. A presentation
On
Case Study: The Chinese Yuan-Beware of Dragon’s
tail
Presented by:
Md Khalid Ekram (11510947)
Equbal Mahboob (11510948)
Anju (11511129)

2. INTRODUCTION
 World's most populous country with a population of
over 1.4 billion.
 China is 3rd
biggest country in the world in term of
area.
 The 1st
in manpower (in term of population).
 2nd
economy (in terms of nominal GDP) of the world
after United State of America (USA).
 More than 700 million of its 1.4 billion people live in
rural area,
 The 2011 Human Development Report shows China
lies at 101 in a list of 187 countries

3. THE RENMINBI
RMB : People’s Currency
1 Yuan = 10 Jiao =10 Fen
Issued by communist party in 1948 before
winning the war and establishing people’s
republic of China.
Revaluation in 1955 to end Hyperinflation
at 1 new Yuan = 10,000 old Yuan

4. China’s Exchange Rate HistoryFrom 1985 to 1993, the Chinese government
follow dual exchange rates policy.
On 1st January 1994, China radically changed its policy. The
double exchange rate system was suppressed, China fixed
the value of Yuan again U.S dollar.
On 21 July 2005, the Chinese authorities decide to revalue
the Yuan 2.1% against the dollar, to switch from the dollar
peg to a basket, and to allow the currency to float more
freely.
Since this date, the Yuan was time to time revalued against
the dollar.
From 2005 to 2009 the Yuan appreciated of 17% in terms of
dollars and its real bilateral rate appreciated of 18 %.

5. China’s TradeChina’s Trade
• After China enter to the WTO in 2001, this effects on bilateral
trade volume
• In 2004 China had a trade surplus of $155 billion with united
states.
• In 2004 China had a trade surplus of $86 billion with EU.
• China then became Japan’s largest source for imports for a
share of 18.3% of Japan’s total import volume, which is higher
than 17.1% from the U.S. The imbalance gap has widened over 4
times.
• According to reports by China’s General Administration of
Customs and the Department of Commerce in the U.S., Sino-
U.S. bilateral trade also increased rapidly after China acceded
to the WTO.

7. Political pressuresPolitical pressures
1.The Chinese government was forced to buy the dollars and issue Yuan
denominated bonds as a way of “sterilizing” the currency.
2.The silent kept by the government of China in order to maintain the
secrecy, because government was not in favor of revalue the Yuan.
3.According to their population size they had also a problem of
employment, so at that time China’s 1.3 billion population is growing at
only 1% a year.
4.China needs to add enough jobs as well displaced workers from its
agricultural sector and state-owned firms.
5.In figures, China had to add 15 to 20 million new jobs per year. In
comparison, The USA created 2,75,000 new jobs in April 2005, where as
China needed to create at least 1.25 million new jobs per month to keep
with its demand.
6.In order to keep the balance if China had focused on the inflation in
check, It needed to have a strong export sector otherwise it might create
complex situations for China.

8. The currency basket issuesThe currency basket issues
1.In July 21, 2005 China delinked the Yuan from its decade-old peg to the
U.S. dollar in favor of a currency basket. The basket was largely
dominated by the dollar, the euro, the yen, and the won because these
currencies had a great impact on China’s foreign trade, investments, and
foreign debt.
2.The Yuan was also influenced by other currencies of other countries
like Singapore, Britain, Malaysia, Russia, Australia, Thailand, and
Canada.
3.Because of the settings in the currency basket Yuan was increased by
2.1%, which leads Yuan at the price of 8.11$ from 8.28$.
4.In 2006, the Yuan appreciated by 5.68% which leads to deficit in U.S.
trade and this deficit increase and continued the pressure on the China.
5.In 2007, Central bank of China thought widening the trading band of
the Yuan, but in that debate with the U.S. treasury department the China
got punitive steps by the U.S. senate.

9. What if the Chinese currency continues to riseWhat if the Chinese currency continues to rise
in small increment?in small increment?
• If the Yuan rises too much, China’s U.S. dollar foreign
exchange reserve will fall.
•Chinese have basically invested their reserves in U.S
Treasury bill, It will effected.
•If the Dollar become weak then Chinese will invest in
Euros.
•Price of Chinese goods increased ,which could reduce the
demand of Chinese goods in USA.
•Export of china get down, which could lead to rise in
unemployment in china.

10. Steps Taken By SAFE:Steps Taken By SAFE:
(STATE ADMINISTRATION OF FOREIGN EXCHANGE)(STATE ADMINISTRATION OF FOREIGN EXCHANGE)
 Trading and Quoting prices in 8 currency pairs, Including
the dollar-sterling and euro –yen.
 Licensed banks were only to allowed to trade the Yuan
against four currencies: the US dollar, the Hong Kong
Dollar,the euro and the yen.
 Trade were at fixed rate, and they did not involves trade
involvement in non-Yuan currencies.
 Opened up trade with 7 international banks, HSBC, City
Group, Deutsche Bank, ABN AMRO, ING, Royal bank of
Scotland and Bank of Montreal and two domestic banks,
Bank of China and CITIC industrial Bank.
 SAFE is responsible for Foreign exchange rate guidelines.

11. Q.1 Evaluate the three choices that China faces
in determining what to do with its currency
value. Which choice would you choose, why?

12. Three Choices:
1. China has to keep fixed rate against dollar
2. Go for the free float, leading the market to fix the value of
currency.
3.Peg Yuan against a basket of currencies.
If I were to make the choice I would prefer the third
option that is to peg Yuan against a basket of
currencies. This will reduce the probability of sharp
rise in the value of Yuan and will make Yuan rather
stable as even if one currency looses value another
will gain. It is also possible to assign higher weight to
the more stable currency like US dollar and Japanese
Yen.

13. Q.2 on July 23, 2005 China revalued the Yuan by
2.1%. Given that the exchange rate was 8.2725
prior to the revaluation, look at the exchange
rate today. How much has the Yuan revalued
against the dollar since then? Do you think this
is enough to take the pressure off China? Why
or why not?

14.  Current exchange rate of Chinese Yuan is 6.36
So according to simple calculation the Chinese Yuan appreciate by approx. 24 %
(base year 2005).
According to the case there are mainly two reasons for the pressure on the
China
Unemployment rate
China’s urban unemployment rate is 4.1% which was 4.4% in 2004-2005.
Average unemployment rate is 4.04% (source:
www.tradingeconomics.com/china/unemployment-rate)
Exports
China’s export is good $177.97 billion, but it can’t balance the factor of
unemployment rate with proportion to the population increase in China.

15. Q.3 which exchange rate arrangement is China
using now?

16. Crawling pegs:
In this, the country maintains the value of the
currency within a very tight margin, but it
changes the value of currency as needed. Thus,
tries to maintain the value of currency but does
not hold rigidity to that value as economic
condition change.

17. Q.4 Assume you are a Chinese exporter. Would
you prefer a Chinese export tariff on selected
garment and textiles export as a way to release
the pressure against the Yuan or a revaluation
of the currency? Why?

18. I would rather prefer the revaluation of the
currency than exercising tariff on selected
garment and textile exports. This is
because export tariff will be a short term
solution which might lead to closure of
small enterprises

19. CONCLUSION
This case looks at the controversial issue of revaluing the Chinese
Yuan. For many years, the Chinese currency has been pegged to the
U.S. dollar. Critics argue that this policy has resulted in an unfair
advantage for Chinese manufacturers exporting product to the U.S.
Pressure to revalue, including threats of trade sanctions against China,
has led the Chinese government to adopt a slightly more flexible
policy which pegs the Yuan to a basket of currencies rather than the
dollar alone. Chinese leaders feel that increasing the value of the Yuan
relative to the dollar would contribute to economic and political
instability in China.

20. Recommendations:
China must let the value of it's currency by market forces to
maintain political and economic stability globally.
Constant large trade surplus is not a good strategy as due to it
economy is largely effected by global economic changes.
Generate employment in the country.
China should more emphasize on the quality of its products in
the global market rather than availability on lesser price.
China should use its trade surplus to increase the standard of
living of its rural population rather than buying US securities.

21. Thank You. ..Thank You. ..