Purchase Solution

Revaluation of the Yuan

Not what you're looking for?

Ask Custom Question

From the perspective Chinese government should they accelerate an upward revaluaton of the Yuan (Renminbi)? Yes or no and why.

Purchase this Solution

Solution Summary

This solution discusses the revaluation of the Yuan.

Solution Preview

Thank you for posting today. It is my goal to provide ideas, definitions, research help, and instructions on how you, the student, should approach the assignment.

Consider the following:

"Revaluing the Yuan: Where Politics and Economics Collide
Published : July 25, 2005 in Knowledge@Wharton

When powerful forces collide head-on at the intersection of politics and economics, the crash is bound to be loud and unsettling.

Consider the current rift between the United States and China over China's currency, the yuan. The Bush administration is publicly pressuring China to allow the yuan to rise against the dollar to stave off protectionist legislation in the U.S. Senate. Some lawmakers, responding to concerns on the part of manufacturers and labor unions, assert that cheap Chinese exports -- made even cheaper by a yuan whose exchange rate, they say, is too low in relation to the dollar -- give Chinese firms unfair advantage over American companies and is a major contributor to the U.S. trade deficit and current-account deficit. In response, Chinese officials, who have kept the yuan fixed at 8.28 to the dollar since 1994, have said firmly that they will not be coerced into taking action by a foreign government seeking to meddle in a matter of national sovereignty.

Faculty members at Wharton and other China-watchers predict that China will eventually revalue the yuan, probably this year, because it is in China's own long-term interest to do so. But the United States, by trying to force the issue in such a vociferous, public manner, is unnecessarily antagonizing the Chinese and possibly delaying the revaluation, according to these experts. They say that the application of pressure by the United States is a political move designed to assuage interests adversely affected by competition from China. They add that revaluing the yuan will not revitalize industries that have been battered by a longstanding and irreversible trend of certain jobs moving to China, where labor and production costs are cheap.

"The Chinese are very proud and they are most likely to revalue when we don't expect it," says finance professor Richard Marston, director of the Weiss Center for International Financial Research at Wharton. "I think they will do something this year, and it will be modest. The more pressure we put on them, the more they are going to balk."

Wharton finance professor Jeremy Siegel says the U.S. pressure on China simply is "not right," adding that countries should be left alone to decide what exchange rates they want to set.

Steve H. Hanke, a professor of applied economics at Johns Hopkins University and a longtime foreign exchange and commodities trader, calls the U.S. move "completely politically driven" and "economic nonsense." He adds: "I think [U.S. officials] are playing to the special-interest crowd. There's no question about that."

Richard Moody, vice president and senior economist at PNC Financial Services Group, in Pittsburgh echoes these views, calling "extraordinary" the amount of pressure the United States is applying to China. "It really is a sovereign decision of the Chinese government as to where they set their currency," he says. "And the pressure they're coming under is complicating the process. It's helping to drive a lot of speculative money into China, with people hoping to make a quick gain on any revaluation of the currency. It's potentially very destabilizing for the Chinese economy."

China has kept the yuan pegged to the dollar in order to encourage exports, which have contributed so much to its stunning economic growth in recent years, and to keep a damper on inflation. Determining how much the yuan should be allowed to appreciate against the greenback is tricky business for Beijing: A rising yuan would make China's goods more expensive overseas, curtailing sales and reducing economic growth.

Marston says China essentially has two options: Allow the yuan to appreciate against the dollar or peg the yuan's value against a basket of currencies -- the dollar, the euro and the Japanese yen. But whatever action they decide to take, Chinese officials should make a bold enough move to avert calls for another revaluation. They are, however, unlikely to be sufficiently bold. "Once they take any action, it will be seen as not enough and it will encourage further speculation," Marston notes. "I'd tell them to choose an exchange rate high enough so as to reduce the pressure for further changes. Piecemeal attempts would require additional changes in the future and increase pressure. They should repeg the yuan against the dollar or, preferably, against a market basket.

"What we need to ask is, 'What can the Chinese do to respond to the pressure without making major changes?' Marston continues. "They could just announce a modest appreciation and then repeg the yuan at 5% more or less than that. That clearly will relieve some of the pressure but could lead to further calls for additional moves."

A Basket of Currencies

Marston says the components of a currency basket, and the weight accorded each currency, would reflect the relative importance of the countries that are major trading partners with China. The advantage of a basket is that if there were a movement by the euro against the dollar, for example, China could adjust to that movement. If the euro were to rise against the dollar, it would force an appreciation of the yuan against the dollar and a depreciation of the yuan against the euro.

Noting that the European Union also has begun to put pressure on the Chinese regarding the yuan -- in a dispute centered on Chinese textile exports to Europe -- Marston says America should ease up on China. "With the Europeans joining us now, we ought to sit back and wait for the Chinese to respond. We ought to use a little less rhetoric and a little less action in the Senate and try to use backdoor diplomacy."

Finance professor Richard J. Herring, director of Wharton's Joseph H. Lauder Institute of Management and International Studies, believes that China will ultimately move to a currency-basket peg, probably without explicitly identifying the weights attached to each currency and probably with a modest appreciation relative to the dollar. "They will probably also adopt a band around that peg within which the exchange rate will be allowed to fluctuate," Herring notes. "That will put China's exchange rate policy in line with most of the other countries in Asia. Currently only three, including China, peg to the dollar. The timing, of course, is anyone's guess, but U.S. policy seems ...

Purchase this Solution

Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.