...Case Study: China Revalues the Yuan and Moves to a Managed Float Regime, July 2005 Since early 1997, the Chinese government had pegged its currency, the yuan (or renminbi), to the U.S. dollar at a rate of Yuan8.28/$. The Chinese government had maintained this peg even through the difficult Asian currency crisis later in that year, when many emerging Asian countries were forced to abandon their pegs. China argued for years that a fixed and stable currency was critical for the development and growth of its economy. Pegging its currency would remove currency risk (regarding the U.S. dollar) and could encourage the development of both Chinese exports and foreign direct investment into the country. The success of the Chinese economy during the pegged period was indeed remarkable, growing in real GDP terms at over 10% per year. As China’s external trade grew, especially its surplus with the United States, increasing pressure was applied to the Chinese government, especially from Washington, to revalue the currency. The U.S. argued that its increasing trade deficit with China was the result of a significantly overvalued yuan. China argued that it was the result of their competitive cost position. While China continued to resist Washington’s calls for revaluation, they did acknowledge that maintaining the peg at 8.28 was becoming very costly in terms of buying U.S. dollars that were flowing into the country from trade and investment. In addition, speculative flows into...
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...Managing the Supply Chain - A Case Study Like many producers of computer peripheral devices, Digitprint Ltd. subcontracted manufacturing of its low-cost, high volume products to firms in China for subsequent shipment to distribution centers in Asia, Europe and North America. Digitprint’s logistics Manager was exploring options to improve both the cost and timeliness of Digitprint’s supply chain for a standard product, a basic laser printer. Moreover, he felt that any improvements for this product line likely could be applied to other product lines. For this printer, the supply chain was quite straightforward. Digitprint routinely had containerized shipments dispatched every two weeks from the subcontractor’s manufacturing plant, with the order size depending on the existing inventory levels in the North American warehouse. Demand for the product averaged 150 cases per week with a standard deviation of approximately 15 cases per week (each case contained one dozen printers and weighs 24 pounds). Because of poor transportation infrastructure in China, export and import customs-related delays and Digitprint’s desire to minimize shipping costs, the printers typically arrived 10 weeks later at the North American distribution center. The total cost of manufacturing was approximately $90 per printer. Senior management had adopted a general guideline of applying an annual carrying charge of 25% to all inventories to reflect shrinkage, obsolescence and opportunity costs....
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... China had to decide whether to have a free floating exchange rate or keeping their new managed floating exchange rate. Over the years the Yuan still moved in a fixed exchange rate in relation to the dollar. This undervalued the Yuan increasing the amount of exports from China and the trade deficit of the United States. They moved to a managed floating exchange rate where the government or Central Bank controls the exchange rate. Free floating depends on the market conditions and equilibrium level. (Hill, 2009) China’s export volume is the driver of their economy growth. Due to the depreciation of the U.S. Dollar, China has been effected by decreased exports and a slower growth rate. They are being pressured to have a more appreciated exchange rate in order to react to these economic events. China can appreciate the Yuan as long as they phase it in according to needs, such as to increase exports of more knowledge-based products to other countries or improving the imbalance of trade to the U.S. (Ding, 2007) Possible Solutions China could have more flexibility in their exchange rate so that the currency can react to domestic inflation of the economic and political events that may directly or indirectly affect China. This would appreciate the exchange rate and create problems for China’s domestic financial markets by decreasing the ability to compete by prices in the international markets. (Chien-Chung, 2010) China could also stay with their managed floating...
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...China’s Managed Float The closing case describes China’s exchange rate policy. For nearly a decade, China fixed its exchange rate to the dollar and bought or sold dollars to maintain the exchange rate. By early 2005 though, the country was feeling pressure both at home and abroad to let its currency, the Yuan, float freely against the dollar. [1]Why do you think the Chinese government originally pegged the value of the Yuan against the U.S. dollar? What were the benefits of doing this to China? What were the costs? Comments: Most of the Chinese exports are made from dollar-denominated imported materials and energy. By pegging to the dollar, China managed its foreign exchange risk in these areas. It also mitigated the risk for investors coming into China. Also, China’s economy, through its peg to the dollar, has remained stable. It was not drawn into the Asian meltdown in 1997. One of the costs of pegging is that the Chinese government has to manage the peg. Thus, it is active in the foreign exchange markets. Another cost is that the dollar’s movement, up or down, affects the Chinese economy. [2]Over the last decade, many foreign firms have invested in China, and used their Chinese factories to produce goods for export. If the Yuan is allowed to float freely against the U.S. dollar on the foreign exchange markets, and appreciates in value, how might this affect the fortunes of those enterprises? Comments: Since they are moving raw materials into China, using...
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...1.1 Introduction: Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another currency or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country it also called rate of exchange or foreign exchange rate or currency exchange rate. 1.2 Objective of the Report: The primary objective of this report is to know the over functions of government in foreign exchange market. But the objective behind this study is something broader. Objectives of the study are summarized in the following manner: • To describe the exchange rate systems used by various government. • To explain how government can use direct and indirect intervention influence exchange rates. • To study existing government control over exchange rate system. • To know how government can affect economic conditions. • To have some theoretical exposures that will be helpful for our future career. 1.3 Methodology: For preparing this report, we have undergone group discussion, collected data from internet. We also studied different circulars and reference books on this topic. We hope these criteria will be enough to find out different picture of government influence on exchange rate system. 1.4 Limitations of the Study: 1. The time, 1(One) week...
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...Below is a brief description of the various arguments presented on the topic. Political: With the value of the Dollar decreasing over the recent years, the western governments are less pleased with China maintaining its currency at a fixed rate. The US and EU are of the opinion that the quasi-fixed exchange rate gives China a competitive advantage, creating a strain on their import surplus and thereby increasing their trade deficit with China. As of 2005, China’s exports and imports to and from the U.S was $86.9 and $27.6 Billion USD. Members of the US congress have threatened to impose tariffs against China if they do not agree to a revaluation. Allowing the Yuan to float would result in an increase in price of Chinese exports to the US and a decline in the price of US imports into China, hence narrowing their trade deficit. On the other hand, analysts argued that the increase in Yuan’s value between 94-01 was not an absolute result of inflation differentials between China and its trade partners. The large increase in exports over those years could be matched by increased imports. Moreover, it was noted that even post revaluation in 2005, the value of RMB non-deliverable forward (NDF) contracts showed only an expected growth of 5% per annum. Economic: One of the key ways in which China ‘fixes’ or maintains its currency to the US Dollar is by converting its FDI (cumulative total balance of $564 billion in...
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...“against” China? The Yuan(RMB) is loosely pegged to the U.S dollar, although China claims that its currency value is managed against a basket of currencies. China has been accused of illegally keeping the Yuan fixed against the U.S dollar. By keeping their exchange rate low, in particular against European currencies, some argue that China gained an unfair competitive advantage in trade. Between 1978 and 2004, GDP in china grew at an average 9.5 % annual rate, FDI increased from zero to $64 billion annually, and trade increased from 10% of GDP to 79% of GDP. U.S imports from china has increased significantly, while manufacturing jobs in the U.S has declined. For example, the case study” China: to float or not to float? (A)” mentions that because of china’s exchange rate policy the U.S had to close 18 textile plants, which created a loss of 16,000 jobs. People tend to believe that China’s growth is taking place at the expense of its many trading partners. Politicians ignore the fact that it is often FDI and foreign companies that are booming the Chinese export locomotive. The truth is that China’s rapid export growth also has a positive impact in East Asian countries. China is the largest importer of South Korean and Taiwanese and it also imports a substantial amount of goods from Japan. Despite the fact that exports of other Asian countries to the U.S decreased, the total exports as been growing as these countries trade among themselves. Companies that produce in China not only...
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...report is written in order to argue about the possibility of the economic implications and foreign exchange risk of the system of exchange rate for multinational companies with subsidiaries which are located in countries with systems such as managed floating exchange rate, fixed exchange rate linked to a basket of currencies and also a fixed exchange rate backed by a currency board system. Unlike the freely floating exchange rate system which has never been applied under its purest form, monetary authorities is required by the managed floating rate in order to interfere in foreign exchange markets to prevent the currencies from moving too far from an apparent fundamental value. 2. i. Managed Floating Rate More and more...
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...The relationship between stock prices and exchange rates in China Mengyuan Chen Illinois Wesleyan University Dec 10, 2012 Abstract This paper uses the data of RMB exchange rates and stock market prices in China from 1994 to 2011 to estimate the relationship between stock prices and exchange rates. There are two major theories concerning the relationship. According to the portfolio balance effect, these two variables should be negatively related; in addition, according to the international trading effect theory, these two variables should be positively related. The linear regression model is adopted to observe the various relationships between stock and foreign exchange markets. The results confirmed my hypothesis, which indicates that the international trading effect is more dominant, thus the net effect is a positive causal relationship from exchange rates to stock prices. I. Introduction Within the emerging Chinese market, China now has more open policies and advanced financial market instruments to promote globalization. For example, China started to allow the RMB to float within a larger daily range in 2005 and brought derivative options into the stock market. These significant steps all suggest that China is beginning to face a new economic condition. For instance, the challenging policy making of RMB exchange rate is one. Exchange rates and stock prices are both key indicators of the economy and financial markets. So the relationship between those two becomes an...
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...Chinese managed Float-format Summary : One of the ways China's economic rise was accomplished was by pegging its currency, the Chinese yuan to the United States dollar and instituting trading arrangements between the two nations. One of the arguments yuan against dollar is that it appears that China benefits more than the U.S. Manufacturers in the U.S. often put pressure on Congress to lobby China to appreciate its currency, citing the difficulty of competing against artificially cheap Chinese goods as a reason for change. Year after year, new bills are introduced by Congress demanding that China appreciate its currency so the yuan and dollar balance is more equalized. They claim the Chinese are protecting their trade superiority and the U.S. is forced to pay the price. Problem detecting : The problem from China's perspective is that appreciating the yuan could mean less foreign investment in China, deflation, lower wages and unemployment. Fewer exports will also diminish China's supply of dollars for investment, both inside and outside the country. China argues that the currency peg is meant to foster economic stability and abandoning the peg could result in an economic crisis. Some benefits of an undervalued yuan for the U.S. include lower prices for consumers, lower inflationary pressure and lower input prices for U.S. manufactures that use Chinese inputs. Alternatively, an undervalued yuan hurts U.S. industries that compete with cheap Chinese goods, thus hurting production...
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...of learning about another country or region is to understand the relationship of its currency with others on the world currency market. As such, you are assigned the duty of ensuring the availability of 100,000 yen for a payment scheduled next month. Considering that your company possesses only U.S. dollars, identify the spot and forward exchange rates. What are the factors that influence your decision to use each? Which one would you choose? How many dollars must you spend to acquire the amount of yen required? DQ #5 (Due by Thursday, January 16th 11:59 pm) Read the Case: China’s Managed Float (p. 371) and then answer the following questions: Why do you think the Chinese government originally pegged the value of the yuan against the U.S. dollar? What were the benefits of doing this to China? What were the costs? What do you think the Chinese government should do? Let the float, maintain the peg, or change the peg in some way? Period 4 (January 20th – 23rd) The deadline to complete Test 1, Test 2, and Test 3 is Thursday,...
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...decrease in asset/claim or increase in liability * Trade balance 3. Almost always referring to merchandise, “tangible goods trade * Types of capital 4. Foreign Direct Investment (FDI) (LTC) 5. Portfolio * Stocks * Bonds 6. Other Capital * Bank loans * 3 types of FC Reserves 7. Gold 8. Freely convertible currency * 60% US * 25% euro * 10% Yen 9. SDRS (IMF $) – Paper money * Special drawing rights * Less than 1% in fed reserves * 3 Macro Options (J. F. Kennedy) 10. FX System to adopt 11. Convertibility and currency controls/transactions (US current policy is free/no control) * China restricts amount citizens can invest in foreign investments 12. Trade (protect home market or open export markets) 1/18/13 FX rate change depends on the strength of the currency Dealing with Euro and European debt crisis Diversification of portfolio Some of portfolio in Euro denominated bond. 1/23/13 * Decline of the dollar * Devaluation -> inflation * Expectations of devaluation * Purchasing Power Parity-Long Run * Increase imports price (demand inelastic-not sensitive to price) * Domestic producers increase prices * CPI * Interest rates – short run predictor * Real interest rates * Nominal interest rates with the rate of inflation ...
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...early 80s, the new policy that opened China to the world had gained great impacts on this country’s economy. To have a further understanding about the China’s currency, we analyze the historical movements of the Yuan (CNY) towards its trading currency pair – the US Dollar (CNY/USD) in a 20-years period till now, argue the policies adopted and other factors that caused such movements of the Yuan in the past. In addition, how arbitragers buy and sell CNY using 2 point, 3 point and covered interest rate arbitrage to make profit in reality is also explained in this report. 2.0 Historical movements of the CNY/USD A flexible exchange rate is a system, which allows exchange rates to be affected by the supply and demand of its currency. It is unstable due to the low elasticity of import and export, which may cause depreciation in the currency, which leads higher levels of inflation. As China is a country with an undiversified export producing industry, it is unlikely that it would adopt this system as when the exchange rates rises, exporters would find it in their favor as they would be able to sell their goods cheaply aboard. However, importers are unhappy with the undervalued CNY as the price they would have to pay for goods would be more expensive and would seek to decrease the exchange rates. This would cause uncertainty with regards to investments and trade. However, Mr Guan, a senior official from China foreign exchange state that if China were to continue the peg with USD, when...
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...Chosen product detailed description After researching, we can find that Jollibee is an American-style fast-food restaurant with Filipino-influenced dishes specializing in burgers, spaghetti, chicken and some local Filipino dishes. In the Philippines, Jollibee serves Coca-Cola products for its beverages; in overseas markets, the chain serves Pepsi products. The Jollibee brand successfully incorporated into its line-up the Sweet & Sour Meatballs, Grilled Pork Tenders, Jollibee floats and Flavored Crispy Fries in 2011. It also introduces the Crunchy Chicken Burger and Chicken Nugget Crunchers to its chicken offerings. The charming thing for me is the brand also added the Corned Beef Pandesal, Chicken Sausages and Pancake Combos, and Hash Brown Burger to its breakfast line, and the Choco Crumble Sundae and Strawberry Sundae for dessert lovers. Thus, we can see that Jollibee is always progress until now. Core target group analysis in the selected market Jollibee principal business is the development operation and franchising of quick-service restaurants under the trade name “Jollibee.” However, Jollibee knows the food quality, service, price-value relationship, store location and ambience, and efficient operations continue to be critical elements of the Company’s success in the quick-service restaurant industry. The company president is Tony Tan Caktiong (better known as TTC). He started Jollibee in 1975 as an ice cream parlor owned and run by the Chinese-Filipino Tan family...
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...higher FDI and flexible exchange rate regimes appears to support Asian countries' economy growth, while more open capital accounts marginally reduce growth facing financial crisis. Taglines/Pull Quotes: * “The majority of Asian countries have some form of flexible regime that we term an intermediate float” * “The marginal impact of public investment is consistently larger than that of private investment” * “The results confirm our earlier expectation that the recent crisis had little impact on Asian growth” Marketing Recommendations: Relevant handles (@s) * @ IMFNews, @ ManukGhazanchya, @ForeignAffairs, @WorldBank Relevant hashtags (#s): * #Asia, #Economy Growth, #Public Investment, #Private Investment, #FDI, # Exchange Rate Regime, # Financial Risk, # Capital Account Openness, #Floating Regime, #Pegged, # Financial Crisis, #IMF Working Paper, #New Determinants Publication Timing: (Article Source) A New Look at the Determinants of Growth in Asian Countries, Manuk Ghazanchyan, Janet G. Stotsky, and Qianqian Zhang, IMF Working Paper, 2015 August. By Yawen Zhao Following several decades of remarkable growth performance, Asian countries, notably China, are facing a possible slowdown in economy growth. With an average rate of 10% a year for the three decades up to 2010 and a growth of 7.4% last year, China's economy growth would slows to 6.8% for this year and 6.3% for 2016, as predicted by the International Monetary Fund (IMF). It is thus interesting...
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