chinese curency

8/3/2019 Chinese Curency

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Chinese Currency

Crisis?


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Chinese Currency

Yuan (CNY)Renmin Bi (RMB)

Jin Kuan

Tael Qian

Yin Bi Kuai

Da Tour Da Mao

US$ = Mei Yuan


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Chinese Currency

Renminbi - -the peoples

currency

Issued by The Peoples Bank of China

Established 1948

Formalized in 1995

Yuan - - is a sub-unit of therenminbi

: Chinese for round


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Agenda

Brief History

How Currency Manipulation works

The Impacts of Manipulation The Claims against China

Virtual Subsidy

Counter Arguments


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Chinas Currency System

History

Republican China (Pre-PRC), currencyproblems, rampant hyperinflation

1949-78, Closed Economy

1994 began peg at 8.28:1US$

2005 floated peg


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Problem

The Chinese Renminbi is undervalued byabout 40% against the $.

The Chinese authorities buy about $1billion daily in the exchange markets tokeep their currency from rising & thus tomaintain an artificially strong competitive

position.


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U.S. Dollar to Chinese Yuan

1995 - 2005 Peg - China sets a rigid exchange rate of to $

2005 - Current Crawling Peg - China allows its currency to

fluctuate between a defined band0.3% to 0.5%

Future Float - China will allow its currency to be

valued by the market


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Timing Exchange Rate Anchor

1995 - 2005:1 USD = 8.28 RMB() US Dollar

July 2005: 1 USD = 8.11 RMB() Basket

Today: 1 USD = 6.55 RMB() Basket


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Exchange Rate: 1 USD = ____ RMB()


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Exchange Rate Adjustment Systems

Managed Float: primarily market-driven float of theexchange rate with occasional government/central bank

intervention

Crawling Peg: a primarily fixed exchange rate is allowedto fluctuate within a band of rates; par value of the statedcurrency is frequently adjusted

Fixed (Pegged) Exchange Rate: government/centralbank completely manages the official exchange rate by tyingit to another countrys currency


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Exchange Rate Regime Today


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Forfeited power of the central bank to influence the economy

through monetary policy

Afixed exchange rate, sometimes called a peggedexchange rate, is a type of exchange rate whereina currency's value is matched to the value of another singlecurrency or to a basket of other currencies, or to another

measure of value, such as gold. Reduced currency risk facilitates investments & trade

Implications of a

Fixed Currency


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IMF 2007 Agreement

A member shall avoid manipulating exchangerates or the international monetary system in

order to prevent effective balance of paymentsadjustment or to gain an unfair competitiveadvantage over other members.


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How Manipulation works

Prints new Chinese Yuan to makepurchases of US$ assets

Chinese Government buys U.S.$denominated assets

Excess demand for RMB is eliminated

Lowered demand = lowered value End result: value of RMB suppressed from

naturally occurring market price.


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Impact of Currency Manipulation(on China)

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)

Lower local wages, Higher employment Expanded Yuan supply.

The Economist 07 05 2007


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The Economist, 07.05.2007


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What 40% undervalued means

At current Managed Exchange Rate

1USD = 6.55600136 RMB

1RMB buys 0.152532 USD

If actual value 40% higher?

RMB would buy 40% more 1RMB = 0.2835448 USD

1USD = 3.5267795 RMB


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Impact of Currency Manipulation(on U.S.)

Increase U.S. trade deficit

Negatively affect U.S. businesses Chinese imports relatively cheaper

U.S. exports to China relatively more expensive

Allows China to undercut American exports toother markets.

According to one think tank,2.4 million U.S.manufacturing jobs were lost between 2001 &2008.


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US Trade Deficit with China

-124 -162-202

-233

-188

-300

-200

-100

0

100

200

300

400

2003 2004 2005 2006 Jan. Sept. 2007

Exports Imports Balance

$ Billion

SOURCE: U.S. Census Bureau, Foreign Trade Division


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US Trade Deficit with China

Trade Deficit with China

0.00

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

(million$

Trade deficit with China


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Loss of Manufacturing to China?

Is USA losing manufacturing jobsto China?

Has currency manipulation caused,or exacerbated that loss?


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A drop in US Manufacturing Employment?


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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)


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Who Loses?

US firms who compete with Chineseimports (US dom. manufacturing)

US Exporters trying to get into Chinesemarket

Chinese consumer, individual

(wages depressed, low competition) *** US firms doing business solely in Asia

profits reported in US$.


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Chinas CPI accelerated in 2007-08

Inflation 2002 to 2008 Q1


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Virtual Subsidy Case Study(Anti-China Lobby Claim)

Chinese Manufacturing Advantage


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Thomas the Tank Engine

Price $9.89.

Manufactured entirely in China, thereforePrice based on factors of input in RMB

Current Exchange rate 1US$:7.54RMB

So actual Price = 74.61RMB expressed inUS$ is $9.89.


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Thomas the Tank Engine

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.


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So What?

Your cost goes up from $9.89 to $13.84.

A US firm can make Thomas locally forless than $13.84.

Thus manufacturing and the related jobsreturn to the U.S.


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The Claims on China

Intentionally Suppressing RMB value

Fueling economic growth/boom

Suppressing local consumers Flooding U.S. markets dumping

Undervalued by 10%-40%


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Does China admit its currency isundervalued?

NO

Beijing says it has merely kept theYuan

stable,without constant fluctuations, to remaincompetitive in world markets.


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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 underdevelopedVulnerable to currency speculation Political risk: currency up? > income down >

employment down > worker unrest > domesticpolitical challenge/crisis = Internal Affairs


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Be careful what you wish for. You might get it !


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Questions?


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Thank you

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