Life after the Yuan Revaluation - Essay Example

Yuan Value China has a long history of controlling the value of its currency and keeping it unusually low in order to boost its own economy. Chinese business shows huge dependence on export. The unusually low value of Yuan makes its export business much profitable as the foreign countries find Chinese goods extremely cheap and import a lot from China. Exporting to China on the other hand is not much beneficial for the foreign companies as they face huge domestic competition with cheaper local goods in Chinese market. The United States being the largest market of Chinese goods faces a huge impact of controlled Yuan value. The United States is projected to suffer from a huge amount of tread deficit ranging to about $700 billion in 2007 whereas the trade deficit with China for the month of May 2007 was approximately $20 billion. Thus it is said that artificially low Yuan value is providing China with undue advantage in trade balance. Under these circumstances the United States followed by some European countries pressurized China to allow its currency to float freely in the market and acquire value fixed by the market. The rise in the value of Yuan will help export to China as the prices of the goods will be cheaper. The US exporters will have to face lower competition in the Chinese market. The import from China on the other hand will suffer as the prices of Chinese goods will increase with appreciation in Yuan value and the prices will be more competitive in US market. Thus the United States wishes to decrease import from China and increase export to China to deal with the trade deficit. After long years of persuasion China responded with slow upward movements of Yuan with a narrow trade band. But in reality it was seen that the gain in Yuan value is insignificant with its continuous loss over the years. According to the United States the Yuan should appreciate at least by 20% to deal with the imbalance in trade. Of late it was seen that China loosened the control on the value of Yuan significantly and Yuan is found to gain about 20% against US dollar since China changed its foreign exchange trading system in 2005 through the revaluation of Yuan by 2.1% (Kurtenbach, 2008). The appreciation of Yuan may affect US import and export companies differently. The major world economies have become extensively dependent on Chinese market and the value of Yuan is a major concern for them. The steady increase in the value of Yuan will help the US companies, which export, to China. The companies, which have considerable market share in Chinese markets, will be the beneficiaries of such appreciation. With the appreciation of Yuan the US dollar will be cheaper to China and the prices of US goods in the Chinese market will decrease. This will lead to lower competition for the US companies in Chinese markets. Thus the US food chain, which makes considerable profit from Chinese market through KFC and Pizza Hut outlets, is likely to gain more. But it is also true that Chinese labor and raw material is much cheaper than that of US. Thus the food business, which involves huge number of semi-skilled and unskilled labor, will still be dearer to the Chinese domestic products. On the other hand Yuan being appreciated the value of raw materials also increase making the food chain to spend more for same production. Thus it can be said that the sudden appreciation of Yuan would not affect US export business much positively (Wikinvest, n.d.). Moreover, a sudden appreciation of Yuan may be fatal for Chinese economy as that is still unstable and maturing. The Chinese banks may not be able to manage properly the sudden volatility of the value and the economic dwindle in the country will not ultimately support the business of the US traders. This was the situation with Japan when they had increased the value of their currency sharply and faced economic liquidation but this did not help the United States to control its trade deficit with Japan (Lo, 2007). Under these circumstances the company should not give in to the short term or little gain from appreciation of Yuan. Instead it should consider the long term effect it is going to face with the revaluation. The company should not depend on the policies of Chinese government for the betterment of their business in China. They should rather concentrate on revision of the price of their own goods and innovation of products instead of pressing someone else to increase their price. Looking for other potential markets will also be helpful. Increased concentration on US domestic market with competitive price can also curb the dependence on Chinese market to some extent. The US importers on the other hand are going to face direct trouble with the appreciation in Yuan values. The US giants like Wal-Mart sells a huge amount of imported Chinese goods. Yuan with quite a low value compared to US dollar helps the company to buy Chinese goods at a cheaper rate and they are able to sell them at lower price in US market ruling out the competition with domestic companies. But a sudden sharp increase in Yuan value will make the Chinese goods costlier to them and they will be forced to transfer the cost to US buyers. As a consequence the buyers can show withdrawal from spending on Chinese goods with higher price. As the high income US consumers are less likely to spend on Chinese imports the higher prices of Chinese goods will directly affect the low income families more regressively. As a result the company may have to face huge loss initially if the issue is not taken care of properly. To deal with these consequences of the appreciation of Yuan value the company, similar to Yum, needs to reduce its dependence on China for its goods. They can consider domestic production of goods or buying from domestic manufacturers. This will also respond to the complaint of unemployment to some extent. Consideration of other developing countries for low cost products and labor can also be helpful (Wikinvest, n.d.). Above all they should not support the policy of pressing China to increase Yuan value. Contrary to the belief of US, the increase in the value of Yuan is not going to affect the economy and trade deficit much positively. There is no denying that the low value of Yuan benefits the United States quite a lot. The US consumers spent a significantly lower amount on the goods acquired from Chinese market. The money they save ultimately goes to the investments which favor the country’s economy. The appreciation of Yuan on the other hand leads to the inflation in the US forcing the consumers to spend more (Saville, 2006). According to Greenspan, the Chairman, US Federal Reserve, imposing tariff on Chinese goods and thereby reducing the inflow would ultimately affect US standard of living adversely as it would mean that the nations large and diverse capital and labor markets would not be employing resources to their maximum advantage (China Daily, 2003). In response to the issue of unemployment he argued that new industries need to be created to increase employment as the reduced import from China may not lead to increased manufacturing jobs in the US. Instead the companies may look for other cheap labor countries to import from. It can also be said that Chinese imports account for less than 10% of all US imports and thus Chinese currency policy is not as responsible for unemployment in US as is being presented. The appreciation in the value of Yuan may account for a very insignificant improvement in trade deficit but it may affect US economy much adversely. With the appreciation of Yuan, if China needs to stop earning surplus US dollar and lending them back to US government; the value of dollar will decrease sharply leading to much increased inflation in the US. As a result the interest rates will increase interfering with the real estate boom (Lim, 2003). Thus the revaluation of Yuan alone is not going to help US economy as a whole. For the betterment of both the countries China needs to increase its consumption and the US needs to control its increasing consumption (Lo, 2007). China is now revaluing Yuan steadily in response to the excessively huge forex reserve of the country compared to FDI inflows which may lead to economic overheating. After long years of furious growth of export based economy, China is now considering long term stable growth. Revaluation of Yuan will help them achieving this goal as well as support the US demand of long time (Mathew, 2005). Speculations are being made on further appreciation of Yuan but China asserted to loosen the control on Yuan not immediately but slowly after achieving stability in the economy of the country. References 1. “Greenspan: Pricier Yuan wont help US trade deficit”, (2003). China Daily, available at: http://www.chinadaily.com.cn/en/doc/2003-12/12/content_289670.htm (accessed on 12 July 2008). 2. Kurtenbach, E., (2008). “China Yuan hits new high against US dollar”. WTOPnews.com, available at: http://www.wtop.com/?nid=111&sid=1424002 (accessed on 12 July 2008). 3. Lim, L., (2003). “Why China Should Not Revalue Its Currency”. Yale Global Online, available at: http://yaleglobal.yale.edu/display.article?id=2443 (accessed on 12 July 2008). 4. Lo, C., (2007, Spring). “It takes two to tango”. The International Economy, 36-85. 5. Mathew, R., (2005). “Life after the Yuan revaluation”. Domain-b.com, available at: http://www.domain-b.com/economy/general/2005/20050802_Yuan.html (accessed on 12 July 2008). 6. Saville, S., (2006). “The ‘Strong’ Yuan”. The Speculative Investor, available at: http://www.gold-eagle.com/editorials_05/milhouse121706.html (accessed on 12 July 2008). 7. Wikinvest, (n.d.). “Revaluing the Yuan”, available at: http://www.wikinvest.com/concept/Revaluing_the_Yuan (accessed on 12 July 2008). Read More