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Chinese Currency
Yuan (CNY) Renmin Bi (RMB)
Jin Kuan Tael Qian Yin Bi Kuai Da Tour Da Mao
Chinese Currency
Agenda
Brief History How Currency Manipulation works The Impacts of Manipulation The Claims against China Virtual Subsidy Counter Arguments
Problem
The Chinese Renminbi is undervalued by about 40% against the $. The Chinese authorities buy about $1 billion daily in the exchange markets to keep their currency from rising & thus to maintain an artificially strong competitive position.
2005 - Current
Crawling Peg - China allows its currency to fluctuate between a defined band
0.3% to 0.5%
Future
Float - China will allow its currency to be valued by the market
Timing Exchange Rate 1995 - 2005:1 USD = 8.28 RMB() July 2005: 1 USD = 8.11 RMB() Today: 1 USD = 6.55 RMB()
Crawling Peg: a primarily fixed exchange rate is allowed to fluctuate within a band of rates; par value of the stated currency is frequently adjusted
Fixed (Pegged) Exchange Rate: government/central bank completely manages the official exchange rate by tying it to another countrys currency
power of the central bank to influence the economy through monetary policy A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. Reduced currency risk facilitates investments & trade
Virtual subsidy Reduced risk for investors ($ peg) Increased competitiveness for FDI Higher cost of foreign consumer imports Higher cost of imported factor inputs (machinery,
raw materials, component parts)
Chinese imports relatively cheaper U.S. exports to China relatively more expensive
Allows China to undercut American exports to other markets. According to one think tank,2.4 million U.S. manufacturing jobs were lost between 2001 & 2008.
300
200 100 0
2003 2004 2005 2006 Jan. Sept. 2007
-124
-162
-202
-188
-233
250,000.00
200,000.00
150,000.00
(million$)
100,000.00 50,000.00
0.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Who Benefits?
Foreign/US firms exporting from China (400 of Fortune 500) US consumer (cheaper goods, higher purchasing power) Component importers from China (resources, machinery, capital inputs, etc.) Chinese Economy (manufacturing base, economic growth)
Who Loses?
US firms who compete with Chinese imports (US dom. manufacturing) US Exporters trying to get into Chinese market Chinese consumer, individual (wages depressed, low competition) *** US firms doing business solely in Asia profits reported in US$.
If overvalued at 40% (The Big if) Exchange rate would be: 1US$:5.39RMB The same Price = 74.61RMB expressed in US$ would be: $13.84.
So What?
Your cost goes up from $9.89 to $13.84. A US firm can make Thomas locally for less than $13.84. Thus manufacturing and the related jobs return to the U.S.
Intentionally Suppressing RMB value Fueling economic growth/boom Suppressing local consumers Flooding U.S. markets dumping Undervalued by 10%-40%
NO
Beijing says it has merely kept the Yuan stable, without constant fluctuations, to remain competitive in world markets.
Chinese Argument
Our developing economy is unstable Currency management necessary to prevent crisis that would impact world economy Must wait until further market reforms are complete Chinese banking system underdeveloped Vulnerable to currency speculation Political risk: currency up? > income down > employment down > worker unrest > domestic political challenge/crisis = Internal Affairs
Questions?
Thank you