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RMB Exchange Rate

RMB Exchange Rate. BUSI 3001 SBLC Week 9 (12) , Spring 2010. Charles Mo & Company May 10, 2010. RMB Exchange Rate. What’s the problem with Remenbi exchange rate? Most would agree that RMB is undervalued What exchange policy should China choose? Lesson from the Yen/ Japanese GDP growth

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RMB Exchange Rate

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  1. RMB Exchange Rate BUSI 3001 SBLC Week 9 (12), Spring 2010 Charles Mo & Company May 10, 2010

  2. RMB Exchange Rate • What’s the problem with Remenbi exchange rate? • Most would agree that RMB is undervalued • What exchange policy should China choose? • Lesson from the Yen/ Japanese GDP growth • Great Currency Debate • Complaint from Congress to President Bush. Under valued Yuan contributes to: • US trade deficit • Lost jobs in US • Suppress US economic growth • Current Washington Position • Congressional attempts to legislate Chinese currency • RMB undervalued by how much? • Is China a currency manipulator? • History of RMB • China Banking Reform • China’s current exchange-rate policy • Financial Acronym

  3. What is the issue with the RMB • Does China believe it is not undervalued? • US believes RMB is undervalued • Why US is reluctant to make any legislative or formal complaint to the international governing bodies? • Does Japan think RMB is undervalued? • What is Japan’s position on RMB? • Does EU countries think RMB is undervalued?

  4. What options does the Chinese have? • Continue to peg to the US dollar • Appreciate over time – conflicts, tensions in trade deficits, internal inflation • Appreciate one time off – affect export, worsen economy • Float the currency • Japan as precedent, not a good strategy • De-stabilize Chinese financial system • Spend all the US currency held in the central bank

  5. Japanese case • In 1990, Japan was on track to become the #1 economy • Average real growth was exceptionally high • 1950-1970 8.4% annual per-capita • 1970-1990: 3.4% annual per-capita • Large trade surpluses • Value of Yen rising • 1971 360 Yen = 1 US$ • 1973 300 Yen = 1 US$ • 1990 130 yen = 1 US$ • 2009 Ave 4% appreciation • Adjusted per cap GDP higher than US

  6. Japanese Yen

  7. NIKKEI - Bubble Burst • 1985 12,000 • 1989 39,000 • 1992 16,000 • 2009 8,700 • After 1991, Japan stopped growing. Average per cap growth is 1.0% • Most Japanese do not see this as a crisis; Japan is still a wealthy, high-tech society, albeit with weak growth

  8. Japanese Unemployment Rate

  9. Treasury Secretary Geithner and Vice Premier Wang Qishan, April 8, 2010

  10. Issues on an undervalued Yuan • Does it significantly harm the US economy? • Would the currency focused legislation and other punitive actions that some in Congress have called for, such as a World Trade Organization (WTO) case against China, actually speed China’s currency reform? • RMB contributes only marginally to the economic problems

  11. Undervalued RMB “contributes” to the US trade deficit

  12. Trade with China : 2009 • NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified. • Month Exports Imports Balance • January 2009 4,178.1 24,748.0 -20,569.9 • February 2009 4,678.4 18,874.5 -14,196.1 • March 2009 5,569.9 21,187.7 -15,617.8 • April 2009 5,164.9 21,918.7 -16,753.8 • May 2009 5,247.8 22,731.5 -17,483.8 • June 2009 5,549.2 23,979.1 -18,430.0 • July 2009 5,274.3 25,691.2 -20,416.9 • August 2009 5,553.1 25,784.7 -20,231.7 • September 2009 5,813.7 27,914.9 -22,101.2 • October 2009 6,857.4 29,520.8 -22,663.4 • November 2009 7,326.3 27,549.9 -20,223.6 • December 2009 8,362.9 26,501.0 -18,138.1 • TOTAL 69,576.0296,402.1-226,826.1

  13. Trade with China : 2008NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified. Month Exports Imports Balance • January 2008 5,854.9 26,167.7 -20,312.8 • February 2008 5,773.9 24,128.6 -18,354.7 • March 2008 6,354.1 22,432.0 -16,077.9 • April 2008 5,680.6 25,919.3 -20,238.6 • May 2008 6,614.3 27,663.6 -21,049.4 • June 2008 6,413.7 27,843.3 -21,429.6 • July 2008 6,437.3 31,314.0 -24,876.8 • August 2008 6,506.7 31,840.2 -25,333.5 • September 2008 5,320.4 33,086.4 -27,765.9 • October 2008 6,071.6 34,028.3 -27,956.7 • November 2008 5,223.4 28,280.6 -23,057.2 • December 2008 5,206.1 25,085.8 -19,879.7 • TOTAL 71,457.1 337,789.8 -266,332.7

  14. Source: USITC

  15. Senator Charles Schumer, one of China’s toughest critics in Congress • The fact that China’s currency has not depreciated but even appreciated a little while all other currencies depreciated against the dollar does show some progress • Mr. Schumer said he still believes China is manipulating its currency • This wouldn’t have been the opportune time to designate the country as a manipulator

  16. During the presidential campaign • When Mr. Obama campaigned for president, he was among the toughest critics of China, accusing the country of manipulating its currency and signing on to legislation which punishes China for manipulating its currency

  17. Senator Lindsey Graham, long a critic of China’s currency practices • The issue of China’s currency appears to have taken a political turn • Something happened between the confirmation hearing(Treasury Secretary) and the report • The South Carolina Republican said more must be done to address the existing currency imbalance.

  18. Letter of complaint on China’s Undervalued Yuan • 15 of the 24 Democratic members of the powerful House Committee on Ways and Means sent a letter to Former President George W. Bush on March 26, 2008 • China’s undervaluation of the yuan makes US exports to China more expensive and Chinese exports to United States cheaper • Contributing to mass US trade deficits • Suppression of US economic growth

  19. China Exchange Policy affect US Loss of manufacturing jobs • Has accelerated manufacturing job losses • US productivity gains resulted in job losses • 3.3 m jobs loss from 83-02 in low and mid skilled jobs • 1.2 m job gain, up 37% • 98-07 US share of global manufacturing output rose from 22.3 to 24.7% with a smaller workforce (US Bureau of Economic) • China’s share is 11.4% (UN Ind. Develop. Organization)

  20. US Unemployment Rate

  21. The effectiveness of a RMB Devaluation – using 2007 Trade Deficit figure US global trade deficit in 2007

  22. US Economy Shrank

  23. Congressional attempts to legislate Chinese currency • 10 currency related bills introduced since the 110th Congress convened in January 2007 • Senator Chuck Schumer(D-NY) and Lindsey Graham (R-SC) introduced a bill imposing a 27.5% tariff on all Chinese goods imported

  24. Administration View on Chinese Currency • Bush was against currency legislation • Obama not to label China a manipulator of currency • RMB is undervalued • China has taken steps to rebalance the economy • Allowing RMB to appreciate • Passed the 585 b stimulus program • China’s currency continued to rise while other currencies have fallen • Risen 16.6% from June, 2008 to February, 2009 • Since 2009, RMB is stable • Economic relations between China and US have become more tense

  25. Capital Account Convertibility or CAC is a monetary policy that centers around the ability to conduct transactions of local financial assets into foreign financial assets freely and at market determined exchange rates.[1] It is sometimes referred to as Capital Asset Liberation. • In layman's terms, it is basically a policy that allows the easy exchange of local currency (cash) for foreign currency at low rates.[citation needed] This is so local merchants can easily conduct transnational business without needing foreign currency exchanges to handle small transactions.[citation needed] CAC is mostly a guideline to changes of ownership in foreign or domestic financial assets and liabilities. Tangentially, it covers and extends the framework of the creation and liquidation of claims on, or by the rest of the world, on local asset and currency markets.[2]

  26. RMB History • 1949-76 PRC founded under Mao • 1976 Deng Xiaoping came onto helm to reform the Chinese economy • 1978-89 Reform/stop • 1990 RMB fixed exchange 1 US$= 5 RMB • 1995 1US$ = 8.5-8.3 RMB • 2005, July Started significant revaluation 1US$=8.3-8.0 • April, 2009, 1 USD = RMB 6.83

  27. Historical Chart of the RMB (Chinese Yuan)

  28. 5 Year Chart RMB to USD

  29. Undervalued? By how much? • Different economists have different estimates • 40% Average (by William Cline and John Williamson of the Peterson Institute of International economics) • Most would like to see either a gradual or a sudden one time appreciation

  30. China’s new exchange-rate policy • the RMB appreciate since the spring of 2005, • RMB pecked to a basket of foreign currencies • Chinese authorities have again linked the RMB to the dollar, since June 2008 • Sentiment is that Yuan should devalue

  31. China and US economic relations • China has expressed concerns in the US Treasury bills. • China owns 500 b in US Treasury bills • US relies on borrowing from the Chinese • Obama administration officials have sought to reassure the safety of the US assets • During the presidential campaign, Obama was among the toughest critics of China manipulating the currency • Treasury secretary, Geithner during the confirmation said China is manipulating the currency

  32. Critics of China RMB policy • Senator Charles Schumer, one of the China’s toughest critics in Congress • Senator Lindsey Graham, long a critic of China’s currency practices

  33. What will be affected of an appreciation in RMB • Chinese Economy • Inflation • Interest • Real Estate • Export • Import • GDP growth • Unemployment • American firms investing in China • Value of investment • Import • Finances

  34. Biggest Four Banks in China • Bank of China (BOC) • Industrial and Commercial Bank of China (ICBC) • China Construction Bank (CCB) • Agricultural Bank of China (ABC)

  35. Acronym • IMF = International Monetary Fund • SDR = Special Drawing Rights • AIG = American International Group • RMB= Ren Min Bi (人民币) • WTO = World Trade Organization • GATT = General Agreement on Tariffs and Trade

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