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The Revaluation of the Chinese Yuan

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Isabel Menéndez

on 3 September 2012

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Transcript of The Revaluation of the Chinese Yuan

The revaluation of the Chinese Yuan 2004-2005. Case summary Core issues Answer to case questions Chinese Yuan exchange rate to USD Case update Before 2005 July, 2005 August, 2012 8.28 Yuan / 1 USD 2%
revaluation 1. Many Chinese critics had urged China to revaluate the yuan by 20% or more. What would the Chinese yuan´s value be in the U.S. dollars if it had indeed been devalued by 20%? 2. Do you believe that the revaluation of the Chinese yuan was politically or economically motivated? We believe that it was motivated by both reasons.

Political:

• First of all it was politically motivated by the U.S and Europe due to the fact that the value of the Yuan was very low and that gave an unfair advantaged in the international trade.

• It was also politically motivated because the U.S. was preparing to impose a 27.5 % tariff on imports from China.

• The Yuan had also been pegged to the U.S Dollar for over 10 years.

• China did it to have a calmer relationship with Washington

Economical:

• The revaluation did not affect their prices too much.

• America´s trade deficit of $700 billion was at the time 9 times China´s surplus so It wouldn´t change that much the global imbalances.

• Transition from central planning to free market economy 3. If the Chinese yuan were to change by the maximum allowed per day, 0.3% against the U.S. dollar, consistently over a 30 or 60 day period, what extreme values might it reach? 8.11 Yuan / 1 USD 6.35 Yuan / 1 USD 4. Chinese multinationals would now be facing the same exchange rate related risks borne by U.S., Japanese, and European multinational. What impact do you believe the rising risk will have on the strategy and operations of Chinese companies in the near future? We think it will have a huge impact because the way they do business will change completely, they will have:

• Currency risks

• Transactions exposure

• Operations exposure

• Uncertainty

• Lose their profit margins against their production costs

• Be more productive, competitive and efficient References •If it was revalued at 30 days it would be worth $7.41 and at 60 days $6.78 • If it was devalued at 30 days it would be worth $8.87 and at 60 days $9.71 Case update Chinese Yuan exchange rate to USD
from 2005 to 2012 Case update Carla Rivera
Angel García
Isabel Menéndez
Ana Paulina López The Chinese yuan´s value would have been $6.90 if it had devalued 20% •The Economist Newspaper Limited. (2011). "Yuan goes up, must come down". Retrieved on August 29, 2012, from http://www.economist.com/blogs/freeexchange/2011/12/chinas-currency

•John Chan. (2005). "China’s yuan revaluation a response to increased US pressure". nternational Committee of the Fourth International. Retrieved on August 29, 2012, from http://www.wsws.org/articles/2005/jul2005/yuan-j29.shtml

•The Financial Times LTD. (2007). "Is Beijing propping up the renminbi?" Retrieved on August 29, 2012, from http://blogs.ft.com/beyond-brics/2011/12/07/is-beijing-propping-up-the-renminbi/#axzz1fkhPu1Ul

•Top Forex News. (2007-2012). "Chinese Yuan". Retrieved on August 29, 2012, from http://www.topforexnews.com/category/chinese-yuan/

•X Rates. (2012). "Historic exchange rates exchange rates (US Dollar)". Retrieved on August 29, 2012, from http://www.x-rates.com/historical/?from=USD&amount=1.00&date=2008-03-2dx 21%
revaluation From central planning to a free market, by widening the free-float range. China's objective: Yuan used as a new reserve currency. Agreements with Russia, Vietnam, and Thailand to trade using renminbi . Increase of China's trade balance surplus with the US. *Millions of US dollars. Case update Increased deficit in U.S. trade with China. *Millions of dollars. United States Census Bureau. (2012). "Trade in goods with China". Retrieved on September 1, 2012, from http://www.census.gov/foreign- trade/balance/c5700.html Eiteman, Stonehill, Moffet. Multinational Business Finance. Pearson / Prentice Hall. 12th. Edition. USA, 2010 US argued that the growing Chinese trade surplus with the US indicated that "the Yuan was significantly undervalued". They 'suggested' the Yuan to be revalued by 10 to 20%. July 21, 2005. China abandoned the peg of the Yuan to the dollar to a managed float. May, 2004. Panel of academic experts to debate the future of the Chinese yuan. “Stay the course” philosophy (Stanford and Columbia) V.S. the “Pro-revaluation” position (Harvard and the Institute for International Economics). Resolution: If the revaluation was too small, the currency markets would demand more, leading to additional instability. Yuan rise to 8.11 Yuan/USD. (2.1% Revaluation). 0.3% deviation was accepted. This would:

a) Limit the day-to-day movement of the Yuan's . value (protection for investors), and

b) Permit the Yuan to begin a minimal float. The chinese Yuan had been pegged to the US Dollar for over 10 years It was undervalued The U.S was ready to impose import tariffs to China if they didn´t revalued the Yuan The European Union was complaining because of unfair advantage in international trade The revaluation would mean that a margin of profitability would be lost because costs would increse
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