...Chinese currency and its devaluation Chinese money is called Renminbi (RMB) means "The People's Currency". The popular unit of RMB is yuan. 1 yuan equals 10 jiao, 1 jiao equals 10 fen. There are parts of China where the yuan is also known as Kuai and Jiao is known as mao. Chinese currency is issued in the following denominations: one, two, five, ten, twenty, fifty and one hundred yuan; one, two and fivejiao; and one, two and five fen. The current official exchange rate between U.S. dollar and Renminbi yuan is about 1:6.8 (1 US dollar = 6.8 yuan RMB). Since the economic reform started in 1979, the Chinese currency (yuan) had been devalued several times until 1994 when the two-tier foreign exchange system was ended. While the official rate of yuan had been maintained constant over seven years since 1998, the pressure on the revaluation of yuan intensified. It has been perceived by some economists that the yuan is undervalued on an order of 37.5%. There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit. Thus, As China pursued its gradual transition from central planning to a free market economy, and increased its participation in foreign trade, the renminbi was devalued to increase the competitiveness of Chinese industry...
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...Summarize and evaluate the arguments presented in the (A) case for and against the revaluation of the Renminbi. Provide your own assessment of the projected future direction of the RMB/USD exchange rate (using info provided in the case). China’s decision to release its currency from the decade long peg (approx. 8.28 Yuan per USD) raised multiple concerns within the global economic community. Many economists welcomed the decision while still others questioned it. 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 $27.6 Billion USD. Members of the US congress have threatened to impose tariffs against China if they do not agree to a revaluation. Allowing the Yuan to float would result in an increase in price of Chinese exports to the US and a decline in the price of US imports into China, hence narrowing their trade deficit. On the other hand, analysts argued that the increase in Yuan’s value between 94-01 was not an absolute result of inflation differentials between China and its trade partners. The large increase in...
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...Case Study: China Revalues the Yuan and Moves to a Managed Float Regime, July 2005 Since early 1997, the Chinese government had pegged its currency, the yuan (or renminbi), to the U.S. dollar at a rate of Yuan8.28/$. 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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...China is under pressure from US to devalue its currency. US believes that due to low value of Chinese Yuan, china is more competitive in exports vis-à-vis US and hence large trade deficits are leading to job losses in the US. However Chinese government claims China is a sovereign nation has the right to manage its currency and the low value of Yuan is actually helping US manage its budget deficit and by buying US treasury bills it was preventing the rise of US interest rates . Moreover many countries have also established their production base in China and hence any major fluctuations in the currency would hurt them. However this situation is potentially inflationary and will work only if the China is able to maintain a high growth rate. Moreover if dollar depreciates the Chinese government will have to write off its dollar assets in form of US treasury bills. China in recent past claims to have pegged its currency to a basket of international currency, but even then dollar carries maximum weight. China has also done mild revaluation and allowed daily fluctuations to the range of 0.3% to 0.05%. However the pressure from US persist even though some countries such as Japan and Korea have engaged in processing trade from China and thus benefitted from low Yuan and retaining greater value of trade for themselves. There are several options available to China: Revalue its currency: It is estimated that if China revalues its currency say from 3-5 % it is estimated that the...
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...1. CHAPTER 1, question 1: The term globalization has become widely used in recent years. How would you define it? = “I define globalization as producing where it is most cost-effective, selling where it is most profitable, and sourcing capital where it is cheapest, without worrying about national boundaries.” 2. CHAPTER 1, question 10: Financial Globalization. How do the motivations of individuals, both inside and outside the organization or business, define the limits of financial globalization? = If influential insiders in corporations and sovereign states continue to pursue the increase in firm value, there will be a definite and continuing growth in financial globalization. But, if these same influential insiders pursue their own personal agendas, which may increase their personal power, influence, or wealth, then capital will not flow into these sovereign states and corporations. The result is the growth of financial inefficiency and the segmentation of globalization outcomes, creating winners and losers. The three fundamental elements—financial theory, global business, management beliefs and actions—combine to present either the problem or the solution to the growing debate over the benefits of globalization to countries and cultures worldwide. 3. Problem 9-1 Americo’s Earnings and the Fall of the Dollar. The dollar has experienced significant swings in value against most of the world’s currencies in recent years. a. What would be the impact on Americo’s consoli-dated...
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...policy. Pertinent Facts The exchange rate is one of the key factors that could possibly affect foreign profitability. In the case, Fung and Wong indicated in 2006, that China had become the world’s third-largest exporter with an estimated $970 billion and earning $1.2 trillion in foreign currency reserves (Fung). The U.S. and other countries are concerned that the Yuan was undervalued which will ultimately raise the demand for Chinese exports and decrease China's demand for imports from other countries. Becker states that if China keeps the dollar and the currencies of other countries artificially expensive compared to its currency it will create a problem towards other economies (Becker). The U.S. believes that China is manipulating the exchange rate to increase trade and dollar assets. The United States have also expressed extreme concern with China’s way of trade. For example, the U.S. questioned the fact that the renminbi is being a peg against the dollar. This case analysis will subsequently identify the following answers to the questions: * Should China allow the Yuan to appreciate? * Will a stronger renminbi strengthen the economy? The above objectives along with other alternatives and observations will be outlined. My goal of preparing this analysis is to primarily illustrate the measures of the competitiveness of China’s trade against the USD. Alternative Solutions Producers may also suggest that the renminbi is an...
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...China's economy On the rebound A strong economic bounce increases the chance of a revaluation Apr 15th 2010 | From The Economist online [pic] THE restaurants and bars of Clarke Quay on the Singapore River hum with crowd-pleasing music, happy chatter—and bloodcurdling screams. Thrill-seekers can strap themselves into the G-Max Reverse Bungy, which flings them 60m upwards with the power of a slingshot. In the first quarter of this year Singapore’s economy performed a reverse bungy jump of its own. It grew at an annual pace of 32.1%, according to preliminary figures released on April 14th. Manufacturing shot up by 139%. The city-state’s authorities announced a “gradual” currency revaluation to reduce inflationary pressure. Impressive in itself, Singapore’s economy may also be a bellwether for its bigger neighbours. On April 15th China reported that its economy grew by 11.9% in the year to the first quarter, its fastest pace since 2007. The strong figure increased speculation that China would follow in Singapore’s footsteps, allowing its currency to strengthen, as America and other countries have been pressing it to do. The yuan has been pegged tight to the dollar since July 2008, much to the consternation of its trading partners. Despite the strong figures China's cabinet is still cautious But China’s cabinet, the State Council, which met the day before its figures were announced, struck a note of caution. It believes the economy still owes its growth to the government’s...
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...The Yuan: The Future Value of RMB Under the Economy of the World Shanghua Chi AWB Introduction From whatever point of view, economic growth is always the most crucial factor in deciding the value of currency for a country. In China, one of the biggest developing countries, the appreciation of the RMB has risen by 28% since 2005, and it has been close to 4.5% growth per year. (Chinese Yuan, 2011) The question is what is the future of RMB? Will it continue in a rising trend? What things can be affected by the change of currency value? In general, the currency value will change when the relation between supply and demand is becoming different. “A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply.”(Exchange rate, 2011) However, answering to these questions involves more complicated aspects: world trading situation, inflation level, and unemployment rate. There is an interactive relationship, which exists between these aspects and the exchange rate. Therefore, to predict the target value of RMB is extremely important for running China. Combined with current reports and researches, I came to a conclusion that the predicted value of RMB should not rise dramatically, and is better to keep the present value. Opposing position The opposing point is that the value of Yuan should rise up. There are broad concerns among economists on a global scale...
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...shake the company’s dominance in the sector. Its rival China Unicom shed 5.26% w-o-w to HK$6.3. Meanwhile, HSBC Holdings has agreed to acquire a 10% stake in Vietnam Technological and Commercial Joint Stock Bank for US$17.3 million, being the third foreign bank to buy into a Vietnamese lender after Standard Chartered and ANZ Banking Group. Shares of HSBC ended 0.72% w-o-w lower at HK$124.5. The H-share index gained 0.41% w-o-w to 5,330.34. Mainland insurance stocks continued to outperform on anticipation that the insurers would benefit from a stronger Chinese Yuan. The Yuan hit consecutive highs against the US dollar since its revaluation in July 2005. Ping An Insurance reached its all-time high of HK$14.50 before settling at HK$14.30, up 1.42% w-o-w. PICC Property and Casualty advanced 4.71% wo- w to HK$2.225 and China Life Insurance increased 0.74% w-o-w to HK$6.85. Oil refiners were in focus after the Chinese government granted Sinopec and its units RMB9.415 billion in subsidies for losses stemming from mainland price limits on refined oil products. Nonetheless, the overall weak market sentiment overshadowed the news. Sinopec slid 0.65% w-o-w to HK$3.85. PetroChina, whose downstream refining business also recorded a loss, was not included in the subsidy plan and its shares closed unchanged at HK$6.3. The market seems lagging...
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...for the revaluation (usually devaluation) of a currency. E.g. Between 1994 and 2005, the Chinese Yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1. 2. Free Floating System In this system the exchange rate is allowed to vary against that of other currencies. It is...
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...China and the Esquel Group China and the Esquel Group In response to criticism of it pegging the Yuan to the US dollar, China recently implemented steps toward liberalizing its exchange rate policy; however, a floating Yuan has created uncertainty concerning its impact on China’s economy. While it is likely that allowing the Yuan to appreciate against the US dollar will result in undesirable impacts for China such as deflation, a reduction of foreign direct investment (FDI), and a decline in exports, we believe China will, and should, continue a tempered liberalization of its exchange rate policy. This is necessitated by the potential consequences China faces both politically and economically by not moving towards a floating rate. Politically, China will continue to absorb the majority of the blame for foreign countries’ rising trade deficits, spawning potential legislation dictating import quotas on Chinese products. Economically, a fixed exchange rate will continue to plague China by its dependence on exports and increase its risk of being able to maintain the value of its portfolio of foreign reserves, most notably the United States dollar. It is our belief that these risks outweigh the benefits of China continuing business as usual. As such, the Esquel Group should devise operational strategies that mitigate the risks of an appreciating Yuan, which include diversifying revenue streams by implementing a textile import division, pursuing growth in domestic textile...
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...currency reserves. In its defense, China asserted that the Renminbi was not undervalued and that its exchange rate policies helped maintain a stable economic environment. It also stated that countries running large trade and budget deficits, specifically with China, like the US, were attempting to use China as a scapegoat rather than the weaknesses of their own economies. Is the Renminbi Undervalued? It appears to me that the Renminbi is likely undervalued. Pegging the currency primarily to the United States Dollar (USD), and eventually to a basket of currencies dominated by the USD, may have created stability in the Chinese and Asian economies both during the Asian crisis and in the current period. However, this peg has undoubtedly reduced the cost of Chinese exports, making them considerably more competitive in unprotected markets, such as in US markets. Chinese officials’ claims that revaluing the Renminbi will likely slow China’s economic growth, slowing the growth of exports by increasing export costs, are...
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...Introduction Foreign exchange is essentially about exchanging one currency for another. The foreign exchange market is global, and it is conducted through the internet, over-the-counter (OTC) through the use of electronic trading platforms, or by telephone through trading desks. Some shorten the term to “forex” or “FX”. The OTC market is also known as the “spot”, “cash”, or “off-exchange” forex market. (A spot transaction refers to an exchange of currencies at the prevailing market rate.). The spot/cash/OTC/off-exchange forex market is not a market in the traditional sense, because there is no central trading location, or exchange. Rather, it is an interconnected and electronic network of bank traders, dealers, brokers and fund managers for electronic transfers of money from one account into another account. The interbank market is one in which huge banks, insurance companies, corporations and other financial institutions manage the risks associated with fluctuations in currency rates by trading in large quantities. The secondary market, that is, the OTC market has developed more recently permitting retail (Smaller)investors to participate in forex markets. The OTC market has many of the same characteristics of the interbank market but it doesn’t provide the same prices, as the size of trades, and the volumes, are much smaller. Trading forex is buying one currency while at the same time selling a different currency. Some companies who do business in other countries...
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...Case 2: CHINESE MERCANTILISM Text 1. Chinese New Year China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory. Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses. Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves. This policy is good for China’s export-oriented state-industrial complex, not so good for Chinese consumers. But what about the rest of us? In the past, China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low — although what we did with those low interest rates was mainly to inflate a housing bubble. But right now the world is awash in cheap money, looking for someplace to...
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...the south, the Gobi desert to the north and inhospitable deserts and high plateaus to the west. The Yellow river in China is said to be the source of the first Chinese culture and civilization. There are many different cultures located in China such as the Yangshao culture, Hongshan culture, and Yunnan culture. Ancient Chinese agrarian religion revolved around the worship of natural forces and spirits who controlled the elements and presided over rivers, fields and mountains. Shaman known as wu acted as intermediaries between the human and spiritual worlds and performed rites to insure good weather and harvests and keep evil spirits at bay. Even though China is regarded officially as an atheist state today, it has had an officially recognized religion since 2356 B.C., when science, religion, mythology and government were all linked together. Taoism and Confucianism began to take shape around the 5th and 6th centuries B.C. but evolved from religions that had been around in China for at least a thousand years before that. China has always been known for having intelligent minds and creating and producing some of the best products. They introduced the world to woven silk, fireworks, playing cards, pasta, fishing reels, whiskey, poison gas, wood block printing, lacquer, compass, and the wheelbarrow. The Chinese mathematicians...
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