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China keeping Yuan undervalued: Is it trying to keep Yuan competitive?

Created by : Jyoti Rath, Sr. Associate, Barclays  | 03 18 2010 13:01:40 +0000
Industry : Equity Research/AnalyticsFunctional Area : Equities(Markets)
Keywords : china dollar international market yuan undervalue
Activity:  235 views;  last activity : 07 06 2010 20:18:09 +0000

It seems the temperature in the long-running dispute over China's exchange rate regime is rising quickly, with a bipartisan bill introduced on Tuesday in the U.S. Senate that aims to get Beijing to let the yuan rise. U.S. is now opposing the over-emphasis on the yuan's exchange rate and has threatened to levy duties on some Chinese exports if it fails to revalue its currency.

http://www.chinadaily.com.cn/bizchina/2007-03/01/xin_08030401161616013781142.jpg

The apparent hardening of positions drove the yuan to a three-week low against the dollar in the offshore forwards market, implying just 2.4% of appreciation over the next 12 months. The World Bank weighed into the debate too, raising its 2010 growth and inflation forecasts for China and recommending a tighter monetary policy and stronger exchange rate to restrain inflation expectations and asset bubbles. Whereas China says they have repeated themselves many and cannot be any clearer.

So user, do you think China is trying to keep Yuan competitive?

  
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China has been in this kind of controversy from a long time. Since, because of its low quality products, other countries don't want to purchase them, China is trying its best to sell its cheap rate products across the world resulting in increase of its exports and by undervaluing its Yuan value, it is preventing other countries to sell it any of their products which will mean its decrease in imports and saving money.
By Jyoti Rath, Sr. Associate, Barclays  03 18 2010 13:01:40 +0000
 
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The basic axiom of external market development is one should first develope the internal market and then go in for developing external market. I think initialy Japan and now China is using the inverse of this law. Japanese have paid a price with the lost decade due to high inflation and speculation that arose due to this in real estate. Now sooner Chinese will follow the same step and it will be interesting to see how they tackle that situation of high inflation with devalued currency.

Errecting barriers by Americans may not work in which case it will turn into reciprocation by Chinese which will be trade war some form of zero sum game.
By Mathew Cherian, Research Associate/Analyst, Western Michigan University  | 03 19 2010 18:49:32 +0000
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yes i do feel so.. for china
By varsha , Head/VP/GM-Quality, frac  | 03 18 2010 16:30:58 +0000
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Yes - no doubt at that.  But is this the purpose of the debate?

In my view the debate is on what is the alternative for other countries in such a situation?  Like you have yourself mentioned, China can produce cheaply and sell in international markets cheaply too.  Simultaneously, it can afford to keep value of its currency low.  

How many countries can afford to do that?  First and foremost, China has the infrastructure to produce cheaply.  Its people are more productive than other countries.  Its products are accepted in other countries.  If quality was much too suspect, they would not have been accepted in other countries.  Now we can not say that all this is because its currency is low while it could be one contributory factor.  Other factors are equally important.  

The best path forward is for other countries including India to emulate China on all fronts - infrastructure, productivity, quality, availability, scalability etc.  Look at this scenario : If all other things are equal, why will a country buy Chinese product where there is an adverse balance of payments while with other countries it is either neutral or favourable?

To me the only negative factor for China is its type and quality of governance.  I have lot of things positive to appreciate China.  However, I would still vote for India who have improved a lot over the years.
By SR Sham Sunder, CEO/MD/Director Technoaid  | 03 18 2010 14:54:43 +0000
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China is keeping its currency undervalued mostly to sustain its export business. China has emerged as 'warehouse of world' over decades. China is composed of a large number of small entrepreneurs established in many cities. Because of its low currency value and government subsidies, they have grown at fast pace. Also this has led to a situation where it has to keep its currency undervalued so that its export industry remains growing. If Chinese currency is allowed to float according to markets then almost 20-30% of export business will drop. The other reason for keeping currency undervalued is that its growth is based on these large number of small businessmen. Though media says that Chinese billionaires in forbes list is increasing every year but in reality a lot of millionaires are evloving because of burgoaning export business. So, China is keeping its currency undervalued in order to protect its political weight in world market and also to support its micro and small entrepreneurs. 
By kiranksrs , National Head, IRIS SERVICES  | 03 18 2010 16:41:41 +0000
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