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Assessing the Likelihood of RMB Devaluation

Assessing the Likelihood of RMB Devaluation. Hung-Gay Fung University of Missouri-St. Louis. External Factors. Asia: maintain export as element of business model. vs. U.S., Japan, Europe. Europe: Euro provides opportunity for domestic growth uncertain opportunities for exports. U.S.:

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Assessing the Likelihood of RMB Devaluation

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  1. Assessing the Likelihood of RMB Devaluation Hung-Gay Fung University of Missouri-St. Louis

  2. External Factors • Asia: • maintain export as element of business model. • vs. U.S., Japan, Europe. • Europe: • Euro provides opportunity for domestic growth • uncertain opportunities for exports. • U.S.: • slow domestic growth, other than technology, • little domestic opportunities. • looking external for opportunities.

  3. China - A Key Global Force • Most important among Asian countries • market of 1.2 billion people • have not been subjected to the currency crisis and is subjected to pressure • Economic growth - • revised GNP growth for China 7% • GNP growth for world = 2% • even at half the growth rates ??? • vs. Devaluation RISK

  4. Market Potential... Source: Worldbank, 1997

  5. The Impact of Crisis on China • More imports from other Asian countries • Korea: steel (32.4%), petro-chemicals (11.8%), and textiles (9%). • China’s exports slow down. • Increase unemployment. • Slowed FDI

  6. Economic Impact on Chinese Exporters • Export goods: more expensive in comparison to Asian countries. • Lack of liquidity in Asia - lower demand. • Erosion of competitiveness • Super-competition from Asian countries, especially Korea and Japan

  7. China Under Pressure • Under pressure to devalue its currency. • Risk of a Chinese RMB devaluation…?

  8. Why RMB may not depreciate • Limited effectiveness in stimulating export (cost of RM imports, J-curve) • Adverse impact on Long-term growth • Negative impact on Asian crisis, hurts its credibility as an Asian Leader • Foreign debt • Other policies options available

  9. China’s Strategies to Stabilize Currency • Stimulate domestic economy. • National Income = C + I + G. • Support exports with tools other than depreciation.

  10. China’s Strategies to Stimulate Domestic Economy • Revive shelved public projects, especially infrastructure projects • Build privately owned housing projects

  11. China’s Strategies to Enhance Exports • Ease Export Credits by encouraging banks to make loans to export-oriented companies. • Relax Export Licenses: • Ministry of Foreign Trade and Economic Cooperation issues more export licenses for base metals. • Increase Tax Rebates: • Exporters will receive full 17% value-added tax.

  12. Regional Rebalancing • An opportunity to ease regional growth gap (Coastal area vs. NW). • A long-term solution to national unemployment problem.

  13. China: A country visited by many... • Stable political environment • Close to US $7 billion FDI in 1996 • Visitors from all over the world • 1.2 billion domestic tourists (High income growth)

  14. Business Strategies • Enhance product lines/marketing (e.g., conferences). • Enhance productivity. • Risks. • Further devaluation, especially China • Inaction

  15. Competition: • From other Asian Countries (especially after devaluation) • Needs to have quality employee to compete...

  16. Corporate Business Strategies - Products • Very high end product • Middle market • alliance - world, corporate and consumer • regional rebalancing

  17. Corporate Business Strategies - Production • Production Costs • Productivity • modernized plants • education of labor force

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