us china exchange rate final

US China Exchange Rate Stand-off

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Presented By:

2/25/2012

0 Ankit sachdeva0 Chetan chauhan0 Kanika goswami

0 Neha dhoot0 Raghav kumra

0 Taqweem ahmed0 Manan shah

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Introduction

“We are very concerned about the negative impact of (China’s) policies on our economic interests” - US Treasury secretary Timothy Geithner.

2/25/2012 Ankit Sachdeva

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0 The tough talk comes amid concerns that the global currency order is unraveling, with countries breaking ranks in a `beggar-my-neighbour’ use of 1930s-style devaluation to help exporters and shore up their economies.

0 U.S.-China economic ties have expanded substantially over the past three decades.

0 China is currently the second-largest U.S. trading partner, its third-largest export market, and its biggest source of imports.

0 U.S. imports from China have risen much more rapidly than U.S. exports to China, the U.S. merchandise trade deficit has surged, rising from $10 billion in 1990 to an estimated $273 billion in 2010.

2/25/2012 Ankit Sachdeva

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..…0 While most of China’s major economic competitors around the

world have seen their currencies climb against the dollar the Chinese Yuan has been virtually unchanged.

0 It’s a primary reason China has been able to achieve such a rapid rise in global economic power.

0 Prior to the financial crisis, the U.S. was on its own to convince China to adopt a more “flexible currency regime”.

0 The results were modestly successful — only after the U.S. Congress threatened to impose a tariff on Chinese imports! China allowed its currency to appreciate by 17 percent against the dollar between 2005 and 2008.

0 But since the financial crisis, China has returned to a peg against the greenback.

2/15/2012 Ankit Saxhdeva

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Background

0 The international monetary system came into existence since the 19th century.

0 After 1870 many countries adopted gold convertibility.0 Under the gold standard each currency was defined in

terms of its gold value.0 One dollar was defined to be equal to the value of

23.22 grains of pure gold or 20.67 US Dollars per ounce.

0 The gold standard broke down during World War 1 but was brought back in 1925.

2/25/2012 Chetan Chauhan

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0 In 1931 due to massive gold and capital outflows, Britain departed from the gold standard.

0 In January 1934 the US President Franklin Roosevelt increased the price of gold from US$20.67 to US$35.00 per ounce.

0 In July 1944 delegates from 44 nations came together at the Nations Monetary and Financial Conference at Bretton Woods to discuss post war recovery.


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0 The conference led to the creation of two international organizations- the IMF and the International Bank for Reconstruction and Development(now World Bank).

0 Bretton Woods system –exchange rate as agreed by member countries.

0 The Bretton Woods system ended on August 1971.0 In the 1970s the Bretton Woods system was replaced

by floating exchange rates which even continued as of 2007.


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0 Establishment of People’s Bank Of China (PBC) and Issue of Renminbi (people’s currency).

0 The foreign exchange rate of the Yuan was fixed taking into account price comparisons of China’s imports and exports.

0 Fluctuations in Yuan-Dollar Exchange Rate and Dual Track Currency System in China.

0 China becomes member of WTO.

CURRENCY IN CHINA

2/25/2012 Kanika Goswami

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…..0 US’s dissatisfaction and concerns for Chinese

manufacturers’ subsidies and the undervalued Yuan.0 Zhou’s statement in defense of China’s currency

policy.0 “A stable Yuan is in the interests of China and the

world.”0 US Senators propose legislation imposing 27.5 %

tariff on all Chinese Imports.


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CHINA SOFTENS ITS STAND

0 On 21st July 2005 china introduced the new exchange rate known as “CRAWLING PEG”.

0 Yuan was referenced not just to USD but to a basket of currencies.

0 The Chinese central bank announced that the closing price of the market each working day would become the central parity rate for the following day.

0 The fluctuations allowed by PBC: USD/CHINA – 0.3% above or below the CPRCNY/MYR & CNY/RUB – 5% above or below CPROther currencies 3% above or below CPR.


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CENTRAL PARITY RATE:

CPR(Thursday) CPR(Wednesday)

USD/CNY 6.2947 6.2939

HKD/CNY 0.81174 0.81154

JPY/CNY(Per 100 Yen) 8.1164 8.0945

EUR/CNY 8.2848 8.3161

GBP/CNY 9.8994 9.9226

AUD/CNY 6.7451 6.7291

CAD/CNY 6.2887 6.2895

CNY/MYR 0.48086 0.48097

CNY/RUB 4.7587 4.7710

* Data as on 22th Feb, 2012


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0 Chinese decision to peg currencies with the basket of countries welcomed by Jim McCormick ,Global head of Lehman Brothers.

0 The decision indicated that the Chinese were moving towards a flexible exchange rate system.

0 The decision was welcomed by various economists and even IMF was satisfied with this decision however Morris Goldstein, a scholar from Institute of International Economics were of a different view which made the revaluation of YUAN a bit skeptical.


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YUAN’S REVALUATION

0 Chinese Government hinted for change in reforms over time.

0 21st July : New exchange rate was announced0 China adopted a managed float system with many

government controls still in place.0 Yuan strengthened to 8.11 from 8.28 to a dollar.0 27th July : Central bank announced no further changes

in the value of Yuan.

2/25/2012 Neha Dhoot

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…..0 These conflicting announcements left a more confused

view of China’s policies.0 On one hand it seemed to move towards liberalization

of the exchange rate system.0 On the other, China still looked inclined towards

managing the currency tightly.0 Change in policy had very less effect on Yuan-US dollar.0 Yuan showed little appreciation against USD even when

most other currencies in the basket appreciated.


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…..0 In 2006, China became the 2nd largest trading partner of US,

with trade valuation at US$ 281 billion.0 The US trade deficit with China went up to US$ 232.5

billion.0 On the other hand, China’s foreign exchange reserves

crossed US$ 987 billion.0 China was increasing its reserves to keep the Yuan weak by

absorbing excess dollars in the market and issuing the Yuan instead.


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Flipside of the coin0 A trade surplus does not constitute any proof of the currency being

undervalued: China-sans-Hong Kong shows trade surplus but China-plus-Hong

Kong does not run big trade surpluses0 Fear of a fall in foreign investments and a slowdown in the domestic

economy: Stronger Yuan could lead to a fall in China’s agricultural exports ,

resulting in low incomes for the Chinese farmers 0 Apprehensive about the transition to a floating exchange rate system:

Chinese banks burdened with sizeable non performing assets would not be able to deal with speculative pressures arising from the floating exchange rates.

2/25/2012 Raghav Kumra


0 ¥ Has appreciated with respect to $.

0 Decrease in foreign investment0 Slowdown in Chinese exports0 Adversely affect the growth 0 Increase in import of food

articles0 Decrease in price of domestic

food products0 Decrease in agricultural export0 Lowering the income of

farmers

¥

Quantity of $

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0 Growing trade deficit was not due to an undervalued Yuan.0 Infact, Low savings rate in US contributed largely to the

trade deficit. (refer table)

0 The undervalued Yuan forced Chinese banks to invest the dollar earnings in US treasury securities, which helped to keep the interests rates in the US low:Today China tops the list of Major Foreign Holders of Treasury

Securities with around US$ 1100.7 billions worth of treasury securities.


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US and China Compared Savings, Investment and Consumption as a

Percentage of GDP

China US

Gross savings as percentage of GDP 49.8 13.5

Household Savings Ratio 30.0 -0.3

Private Consumption as a % of a GDP 39.9 70.0

Gross fixed investment as a % of GDP 44.4 16.7

Gross National Savings as % of gross national investment

12 69

Current account balance as a % of GDP 5.2 -6.5


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0 The undervalued Yuan lowered the price of imports from China, thereby increasing the purchasing power of the US Consumers.

0 Low priced imports of Chinese manufactured products aided the manufacturing sector of US.

0 The difference in key interest rates between the US and China was more than 300 basis points.

0 The job losses in the US manufacturing sector had been due to the economic recession in the US.


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0China continued to be a large market for US products.

0The mutually beneficial relationship between them would have been disrupted by imposing tariffs on Chinese goods.

0US trade deficit was growing at more or less the same rate with the rest of the world.


Current Scenario 0 The U.S. goods trade deficit with China increased $68.5 billion in

2010, and was responsible, alone, for nearly three-quarters (72.6%) of the growth in the U.S. current account deficit.

0 Between 2000 and 2010,Chinese share raised from 3.9% to 10.5%, while the U.S. share declined nearly a third, from 12.3% to 8.5% in the export market.

0 Revaluation would improve the U.S. current account balance by up to $190.5 billion.

0 2.25 million U.S. jobs and reducing the federal budget deficit by up to $857 billion over 10 years.

2/25/2012 Raghav Kumra 24

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Outlook

0 In early 2007, China was a major market for US companies and an important source of capital for the US economy.

0 Yuan-US dollar exchange rate remained at levels similar to late 2006.

0 There were no indications that the Yuan would be revalued in the near future.

0 Exchange rate on 26 April, 2007 was 7.7265 Yuan to the US dollar.

2/25/2012 Taqweem Ahmed

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0 2006-07: China recorded a GDP growth of 10.5% and increased exports by 25%.

0 China was one of the world’s largest importers of raw materials and one of the largest exporters of manufactured goods.

0 Also it was the world’s third-largest importer, behind only the US and Germany.

0 Cheap Chinese products captured the world markets- low prices lured the shoppers.


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0 China’s increasing share in the world trade prompted US government officials to express dissatisfaction over the pace at which China was moving toward a floating exchange rate system.

0 China’s currency was appreciating at a fast pace- the value of which was not market determined.

0 Most economists were not in favor of this sudden revaluation.

0 On the other hand, China continued to deny US allegations of currency manipulations, claiming its currency policy was shaped by national interest.


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0 In march 2007 US Department of Commerce announced the imposition of penalty tariffs on the imports of coated free sheet paper from China.

0 According to Carlos Gutierrez, preliminary duties of between 10.9% & 20.35% would be applied to the coated paper imports from China.


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0 Amidst Chinese opposition several producers in US demanded imposition of trade sanctions against China.

0 Many economists were of the view that trade sanctions would backfire and hurt US producers.

0 US companies in business with East Asia were also expected to bear the brunt of this fallout.

2/25/2012 Manan Shah

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0 It was generally believed that if China allowed the Yuan to appreciate, it would result in a rise in prices in the US as well as in several countries.

0 As per XEA Report Yuan was expected to appreciate by 5 percent against US dollar by 2007 end.However, Chinese wanted it to be a little slower, and so decided to take the measures to strengthen the value of Yuan.


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Reasons for US CHINA TRADE DEFICIT

0 China restricts access to its markets while aggressively

0 supporting exports by its domestic firms.0 China’s low-wage/low-cost advantage.0 China’s artificially undervalued currency. 0 Americans Consuming, not Saving0 Relocation of Exports to China from elsewhere in Asia0 Over counting China exports: Example Apple’s iPod0 Undercounting U.S. sales


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Thank You

2/25/2012

us china exchange rate final

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