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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 l.jpg
Assessing the Likelihood of RMB Devaluation

Hung-Gay Fung

University of Missouri-St. Louis


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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.


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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


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Market Potential...

Source: Worldbank, 1997


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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


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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


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China Under Pressure

  • Under pressure to devalue its currency.

  • Risk of a Chinese RMB devaluation…?


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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


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China’s Strategies to Stabilize Currency

  • Stimulate domestic economy.

    • National Income = C + I + G.

  • Support exports with tools other than depreciation.


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China’s Strategies to Stimulate Domestic Economy

  • Revive shelved public projects, especially infrastructure projects

  • Build privately owned housing projects


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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.


  • Regional rebalancing l.jpg
    Regional Rebalancing

    • An opportunity to ease regional growth gap (Coastal area vs. NW).

    • A long-term solution to national unemployment problem.


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    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)


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    Business Strategies

    • Enhance product lines/marketing (e.g., conferences).

    • Enhance productivity.

    • Risks.

      • Further devaluation, especially China

      • Inaction


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    Competition:

    • From other Asian Countries (especially after devaluation)

    • Needs to have quality employee to compete...


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    Corporate Business Strategies - Products

    • Very high end product

    • Middle market

      • alliance - world, corporate and consumer

      • regional rebalancing


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    Corporate Business Strategies - Production

    • Production Costs

    • Productivity

      • modernized plants

      • education of labor force


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