...China: To Float or Not To Float? International Finance 1 - What are the implications of China’s exchange rate policy on doing business with and “against” China? For years, China’s currency was undervalued. Many analysts and economists estimated that the Chinese currency (Yuan) was undervalued by 35%. So, for years, China kept a higher exchange rate. By doing so, China has some advantages but also some disadvantages. First, by undervaluing its currency, China keeps the Yuan as a weak currency, (because you need more Yuan to buy a US dollar). By doing that, China was able to keep a competitive advantage over other countries such as the US. Their products were sold for a cheaper price compared to the US products. But even if there are advantages, there are also disadvantages to have a high exchange rate. By having an undervalued currency, importations become really expensive. In fact, by having a high exchange rate, due to the price of importations, the deficit of China is also increasing. After several calls, the 21st of July 2005, China revalued its exchange rate from 8.28 Yuan per U.S dollar to 8.11 Yuan per U.S dollar. It implied other consequences on doing business with and “against” China. 2 - How is China’s exchange rate policy linked to its development strategy? How would changes in exchange rate policy impact growth in China as well as the rest of the world? Is the current exchange rate policy sustainable in the long run? China has known a relatively fast...
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...UNIVERSIDAD VIRTUAL “FINANZAS INTERNACIONALES” REPORTE DEL CASO 1: “China Floatornot to Float” AUTOR: CASO HARVARD BUSINESS SCHOOL Profesor Titular: Dr. Gerardo Salazar Viezca Profesor Tutor:Mtra. Mónica Vargas EQUIPO F Fernando Torres Ortega A00903016 Diego Fernández Martínez A00945880 Marisela Monserrat Rodríguez Dávila A00949313 Vianey Irene Eslava Mendoza A00986319 Estefany Paola Lazcano Alcibar A00988306 A 3 de Febrero de 2014 Introducción China era una economía retrasada y cerrada al comercio exterior. Con la entrada de Secretario General DengXiaoping se empezaron a hacer reformas en el sector público, bancario, comercio internacional e inversión extranjera. La productividad en las empresas estatales del estado mejoró, sin embargo no fue tanto el fenómeno como el que experimentaron las empresas privadas; por lo que tiempo después se llevó a cabo otra reforma para empezar a privatizar algunas empresas estatales. Para 2005 los únicos sectores que el gobierno protegía eran el bancario, la energética y las telecomunicaciones. Las malas políticas del sector bancario hicieron que tuvieran gran proporción de cartera vencida. Se creó un instituto para la supervisión y regulación del sistema bancario con el fin de regular el riesgo en las operaciones bancarias. China se abrió al comercio internacional reduciendo las tarifas de importación y exportación gradualmente. Convirtiéndose así la tercera nación con mayor intercambio internacional en 2004...
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...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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...James L. Go Return to GLOBE TELECOM INC Chairman, Chief Executive Officer, Chairman of Executive Committee, Member of Remuneration & Compensation Committee, Member of Audit Committee, Member of Nomination Committee, Chairman of Universal Robina Corporation, Chairman of Robinsons Land Corporation, Chairman of JG Summit Petrochemical Corporation, Chief Executive Officer of Universal Robina Corporation, Chief Executive Officer of Robinsons Land Corporation and Chief Executive Officer of JG Summit Petrochemical Corporation, JG Summit Holdings Inc. Background Mr. James L. Go has been the Chairman and Chief Executive Officer of Oriental Petroleum and Minerals Corp. (OPMC). since 2002. Mr. Go has been the Chairman of the Board and Chief Executive Officer of Universal Robina Corp.(also known as URC)- Parent of Nissin-URC; URC Philippines Ltd., Universal Robina (Cayman), Ltd., URC International Co. Ltd. and Robinsons Land Corporation since January 1, 2002. Mr. Go serves as Chairman and Chief Executive Officer of JG Summit Petrochemical Corporation, Manila Midtown Hotels and Land Corporation, Litton Mills, Inc., RLC, CFC Corporation, Universal Robina Sugar Milling Corporation, Southern Negros Development Corporation and Robinsons, Inc. Mr. Go has been Chairman and Chief Executive Officer of JG Summit Holdings Inc. since January 1, 2002. Mr. Go serves as President of Gokongwei Brothers Foundation, Inc. He joined URC in 1964. Mr. Go served as the Chief Executive Officer and...
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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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...of the Problem 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...
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...benefits of doing this for China? What were the costs? 1. The U.S. dollar was the strongest in the global market. The benefits for China were that their yuan would stay weak, their exports would remain cheap, and their economy would thrive on production for the U.S. economy. The costs for China were that they had to exchange for U.S. dollars every month and that their exchange was the U.S. deficit. 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? 2. The enterprises would have to pay the factory workers more money. It might not be worth exporting the labor. 3. How might a decision to let the yuan float freely affect future foreign direct investment flows into China? 3. China’s FDI would suffer because countries would no longer hire out China’s laborers. China would lose working contracts because country’s domestic labor would become more economical. 4. Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might the global implications of this be? 4. The whole idea of keeping the yuan low in value on the global market is so that countries would buy China’s exports. This kept the Chinese economy thriving. If China no longer provided for...
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...the benefits of doing this for China? What were the costs? The U.S. dollar was the strongest in the global market. The benefits for China were that their yuan would stay weak, their exports would remain cheap, and their economy would thrive on production for the U.S. economy. The costs for China were that they had to exchange for U.S. dollars every month and that their exchange was the U.S. deficit. 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? The enterprises would have to pay the factory workers more money. It might not be worth exporting the labor. How might a decision to let the yuan float freely affect future foreign direct investment flows into China? China’s FDI would suffer because countries would no longer hire out China’s laborers. China would lose working contracts because country’s domestic labor would become more economical. Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might the global implications of this be? The whole idea of keeping the yuan low in value on the global market is so that countries would buy China’s exports. This kept the Chinese economy thriving. If China no longer provided for the world...
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...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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...Leah Schneider China: To Float or Not to Float Questions 1. What are the symptoms of an undervalued currency? Use this for the case of China in 2006. The symptoms of an undervalued currency are an increase in demand for that currency without a complementary increase in exchange rate. This is happening in China as companies locate themselves within China to take advantage of the favorable exchange rate. 2. What are the probabilities that the Chinese government will float and/or allow the fx rate to appreciate in the medium term? The probability that the Chinese government will float the Yuan is low. There has been very little organic, non-governmental movement of the Yuan in the past. The Chinese government has a history of keeping the Yuan low to encourage exports. They may in the medium term allow the Yuan to appreciate further than the 2.1% of July 2005. 3. What has changed since 2006 - present? The Yuan has appreciated since 2006 going from 8 Yuan to a dollar to 6.5 Yuan to a dollar, a rise of 20%. This has caused a rise in export prices and less of an advantage for China. 4. What would be the implications of an appreciation of the Yuan for ABB? The Yuan appreciating might be bad for ABB. They have a long term plan of growth and improvement for their Chinese facilities, which would now be more expensive. However, the appreciation is not all bad. ABB has 6% of its profits in Yuan and with the appreciation of the Yuan; this money would be more valuable against...
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...are the five major Chinese stock market indexes mentioned in the case? Briefly summarize how each index is constructed. The five major Chinese stock market indexes: SSE Composite Index, CSI 300 Index, S&P/CITIC 300 Index, FTSE Xinhua (A) 600 Index, MSCI China A Index. * SSE Composite – Simply includes all listed stocks (A shares and B shares) at Shanghai Stock Exchange. Composite indices are weighted by total number of shares and the base period is the total market capitalization of all stocks of that day. (Base date: Dec. 19, 1990 / Base value: 100) * CSI300 Index – Includes A shares listed at the two exchanges (Shanghai and Shenzhen) in China. Weighted by float-adjusted shares. Stocks that rank top 300 are selected as index constituents considering size and liquidity. (Base date: Dec. 31, 2004 / Base value: 1,000) * S&P/CITIC 300 Index – Includes A shares listed at the two exchanges (Shanghai and Shenzhen) in China. Calculated using a base-weighted aggregate methodology and weight is determined by the float-adjusted market capital of the stock. (Base date: Feb. 27, 2004 / Base value: 1,065.87) * FTSE Xinhua (A) 600 Index – Includes A shares listed at the two exchanges (Shanghai and Shenzhen) in China. Consisting of 600...
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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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...“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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...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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...Trakya Cam San. A.Ş. manufactures high-quality float glass, frosted glass, coated glass, energy glasses, home appliances glass, laminated glass, mirror glass, automotive and encapsulated glass for domestic and international markets. Most of the world’s float glass production is used in buildings, constituting c.83% of the global glass usage. In building products, basic glass can undergo two or more stages of processing before being installed as original or replacement windows and glazing systems. While 40% of the float used for buildings are used for new construction, 40% is used for refurbishment and 20% is used for interior design. Automotive market demands 7% of the total supply. Lastly 10% of the flat glass are used in special applications, solar energy being the most notable one. Vision: To be a fast growing global flat glass company with its strong brands and innovative solutions Strategy: Globalization (Organic & Inorganic) Profitable and Fast Growth Beyond Regional Leadership Wide Product Portfolio with Value Added Products Product Innovation and Advanced R&D Effective Total Cost Management Environment & Sustainability Market & Customer Focus PORTER’S 5 FORCES ANALYSIS FOR TRAKYA CAM SAN. A.Ş. Threat of new entrants-Low Pressure Entry barriers are relatively high for the flat glass industry due to the high cost of manufacturing investment. There is only China threat for the sector which effectuate only 8% of European sector. Four companies meet...
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