Transcript Recommending a Strategy

RMB Exchange Rate
BUSI 3001 SBLC
Week 9 (12), Spring 2010
Charles Mo & Company
May 10, 2010
RMB Exchange Rate
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What’s the problem with Remenbi exchange rate?
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Most would agree that RMB is undervalued
What exchange policy should China choose?
Lesson from the Yen/ Japanese GDP growth
Great Currency Debate
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Complaint from Congress to President Bush. Under valued Yuan contributes to:
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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
What is the issue with the RMB
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Does China believe it is not undervalued?
US believes RMB is undervalued
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Does Japan think RMB is undervalued?
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Why US is reluctant to make any legislative or formal
complaint to the international governing bodies?
What is Japan’s position on RMB?
Does EU countries think RMB is undervalued?
What options does the Chinese have?
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Continue to peg to the US dollar
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Float the currency
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Appreciate over time – conflicts, tensions in trade deficits,
internal inflation
Appreciate one time off – affect export, worsen economy
Japan as precedent, not a good strategy
De-stabilize Chinese financial system
Spend all the US currency held in the central bank
Japanese case
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In 1990, Japan was on track to become the #1
economy
Average real growth was exceptionally high
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Large trade surpluses
Value of Yen rising
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1950-1970 8.4% annual per-capita
1970-1990: 3.4% annual per-capita
1971
1973
1990
2009
360 Yen = 1 US$
300 Yen = 1 US$
130 yen = 1 US$
Ave 4% appreciation
Adjusted per cap GDP higher than US
Japanese Yen
NIKKEI - Bubble Burst
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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
Japanese Unemployment Rate
Treasury Secretary Geithner and Vice Premier Wang
Qishan, April 8, 2010
Issues on an undervalued Yuan
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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
Undervalued RMB “contributes” to the US trade deficit
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Trade with China : 2009
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NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified
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Month
January 2009
February 2009
March 2009
April 2009
May 2009
June 2009
July 2009
August 2009
September 2009
October 2009
November 2009
December 2009
TOTAL
Exports
4,178.1
4,678.4
5,569.9
5,164.9
5,247.8
5,549.2
5,274.3
5,553.1
5,813.7
6,857.4
7,326.3
8,362.9
69,576.0
Imports
24,748.0
18,874.5
21,187.7
21,918.7
22,731.5
23,979.1
25,691.2
25,784.7
27,914.9
29,520.8
27,549.9
26,501.0
296,402.1
.
Balance
-20,569.9
-14,196.1
-15,617.8
-16,753.8
-17,483.8
-18,430.0
-20,416.9
-20,231.7
-22,101.2
-22,663.4
-20,223.6
-18,138.1
-226,826.1
Trade with China : 2008
NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified.
Month Exports Imports Balance
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January 2008
February 2008
March 2008
April 2008
May 2008
June 2008
July 2008
August 2008
September 2008
October 2008
November 2008
December 2008
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TOTAL
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5,854.9
5,773.9
6,354.1
5,680.6
6,614.3
6,413.7
6,437.3
6,506.7
5,320.4
6,071.6
5,223.4
5,206.1
71,457.1
26,167.7
24,128.6
22,432.0
25,919.3
27,663.6
27,843.3
31,314.0
31,840.2
33,086.4
34,028.3
28,280.6
25,085.8
337,789.8
-20,312.8
-18,354.7
-16,077.9
-20,238.6
-21,049.4
-21,429.6
-24,876.8
-25,333.5
-27,765.9
-27,956.7
-23,057.2
-19,879.7
-266,332.7
Year
US Exports
US imports
US trade balance
1980
3.8
1.1
2.7
1985
3.9
3.9
0
1990
4.8
15.2
-10.4
1995
11.7
45.6
-33.8
2000
16.3
100.1
-83.8
2001
19.2
102.3
-83.1
2002
22.1
125.2
-103.1
2003
28.4
152.4
-124.0
2004
34.7
196.7
-162.0
2005
41.8
243.5
-201.6
2006
55.2
287.8
-232.5
2007
65.2
321.5
-256.3
2008
71.5
337.8
-266.3
2009
59.2
292.5
-233.3
Source: USITC
Senator Charles Schumer, one of China’s
toughest critics in Congress
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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
During the presidential campaign
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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
Senator Lindsey Graham, long a critic of China’s
currency practices
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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.
Letter of complaint on China’s Undervalued Yuan
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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
China Exchange Policy affect US Loss of manufacturing jobs
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Has accelerated manufacturing job losses
US productivity gains resulted in job losses
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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)
US Unemployment Rate
The effectiveness of a RMB Devaluation –
using 2007 Trade Deficit figure
China
32%
256 b
Asian
countries
Other
countries
Total
17%
136 b
51%
408 b
100%
800 b
US global trade deficit in 2007
US Economy Shrank
Congressional attempts to legislate Chinese currency
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10 currency related bills introduced since the 110th
Congress convened in January 2007
Senator Chuck Schumer(D-NY) and Lindsey Graham (RSC) introduced a bill imposing a 27.5% tariff on all
Chinese goods imported
Senate Finance Bill
(S1607) BaucusGraassley SchumerGrham
Senate Banking
Bill(S.1677) DoddShelby
House Bill(h.R. 782)
Hunter-Ryan
Reform to the Treasury
Report
Treasury must
determine whether a
currency is
“fundamentally mid
aligned”
Treasury must
determine whether a
country manipulates”
its exchange rate
Determination of
“fundamentally misaligned” to the standard
of “currency
manipulator”
Key Enforcement
Measurement
Antidumping (AD)
Ban federal
procurement
IMF involvement
Oppose financing to
companies doing
business
IMF consultation
WTO Tariff and Trade
AD
IMF consultation
Financing restriction
Administration View on Chinese Currency
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Bush was against currency legislation
Obama not to label China a manipulator of
currency
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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
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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]
RMB History
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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
Historical Chart of the RMB (Chinese Yuan)
4976
7689
90
Mao Deng 5
Zhed Xiao
ong ping
95
00
01
02
03
04
05
06
07
08
09
8.5
8.3
8.3
8.3
8.3
8.3
8.0
7.5
7.3
7.0
6.8
5 Year Chart RMB to USD
Undervalued? By how much?
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Different economists have different estimates
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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
China’s new exchange-rate policy
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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
China and US economic relations
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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
Critics of China RMB policy
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Senator Charles Schumer, one of the China’s
toughest critics in Congress
Senator Lindsey Graham, long a critic of China’s
currency practices
What will be affected of an appreciation in RMB
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Chinese Economy
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Inflation
Interest
Real Estate
Export
Import
GDP growth
Unemployment
American firms investing in China
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Value of investment
Import
Finances
Biggest Four Banks in China
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Bank of China (BOC)
Industrial and Commercial Bank of China (ICBC)
China Construction Bank (CCB)
Agricultural Bank of China (ABC)
1983-84
spins off four major state-owned banks (the Big Four)—the
Bank of China, Industrial and Commercial Bank of China,
China Construction Bank (CCB), and Agricultural Bank of
China—from the People's Bank of China (PBOC).
1994
reorganizes the Big Four into commercial banks to
be operated on a profit-and-loss basis.
China also establishes three policy banks—China
Development Bank, Export-Import Bank of China,
and China Agricultural Development Bank—to
perform policy-lending functions.
1995
The PRC Law on the PBOC allows PBOC to act only as a
central bank, overseeing China's monetary policy and
regulating the entire financial sector, rather than carrying on
commercial banking functions.
1996
China permits the establishment of Minsheng Bank, China's
first publicly traded, largely private bank
2001
joins the World Trade Organization (WTO) and
promises to open its banking sector gradually to
foreign firms by December 11, 2006.
2003
China amends the PRC Law on the PBOC and the PRC
Commercial Banking Law to establish the China Banking
Regulatory Commission (CBRC) to oversee and regulate
the banking industry.
2006
Under China's WTO commitments, the country is scheduled
to fully open its banking sector to foreign banks by
December 11.
Acronym
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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