After years of speculation, China has finally dropped its peg to US dollar. The pegged value of the RMB or Yuan has been adjusted to 8.11 from 8.31. This humble revaluation of 2.5% will for the most part do little to ease the United States’ trade deficit. It does however have significant political and market implications. Most US Senators feel that the revaluation move was too small and that China needs to allow the currency to increase in value, especially since 2.5% pales in comparison to the RMB’s predicted undervaluation of 30-40%.
China is keeping its 0.3% percent daily trading band against the dollar, which means that even with this move there will not be a lot of volatility in the currency pair. China has many reasons to want to revalue their currency. The revaluation also makes imports cheaper for China. This comes at a critical time when commodity prices are rising. The revaluation immediately makes prices of commodities such as oil 2.5% cheaper for the Chinese.
China’s move has many consequences for all of the financial markets. The most significant of which will probably be in US treasuries. China is the world’s second largest holder of US treasuries. China’s revaluation and move to a basket float significantly reduces their need for US treasuries and could potentially take away a big buyer from the market. If this is the case, it will cause bond prices to decrease and long-term yields to rally, which could offset some of the additional pressure on the Federal Reserve to continue raising rates. If China even begins to dump US treasuries, we could see the “yield curve conundrum” begin to fix itself. "Yield curve conundrum" refers to how Federal Reserve Board Chairman Alan Greenspan described the strange result that, despite six successive 25-basis-point increases in the federal-funds rate since June 2004, longer-term interest rates actually declined during the same period.
The reduced demand for US treasuries and the possibility of increased demand for other currencies such as Euros and Japanese Yen could be very detrimental for the US dollar. Right now, the dollar is holding somewhat steady against the Euro due to the fact that China has yet to announce the currencies within the basket they plan to use to base the float on. Once they confirm that the Euro will be included in the basket, the single currency could skyrocket. The one major...
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...f the Yuan increases the risk for default on non-performing loans for the country’s banking sector. China’s banking system has a significant amount of non-performing loans and although there’s been a mobilization to solve this problem, with many of the non-performing loans being exported and bought by large US investors, it is still a problem that exists to some extent. An increase in the value of the Yuan will automatically increase the value of the non-performing loans. Also, the Chinese government has massive amounts of US dollar assets, which they used to peg the Yuan. These assets will lose value in proportion with the revaluation of the Yuan.
This is only the beginning of China’s revaluation. China will be repeatedly pressured to institute a larger revaluation. The managed float allowed them to gradually adjust the value of the Yuan without major sudden changes to their economy. Central banks worldwide are going to be eager to take the Yuan as a reserve currency because it is guaranteed to go up in relative value. With the U.S. running massive federal and trade deficits, central banks around the globe are eager to diversify away from the dollar.
Most economists predicted that a currency crisis was unlikely to damage China’s economy or trade; its macroeconomic fundamentals were healthy and it had the extra insurance of capital account controls. However, surrounded by neighbors in trouble, China could help but be somewhat effected by the larger, regional situation. The rest of the world continued to watch and worry about how much longer China would be able to defend its overvalued currency and still remain internationally competitive on an export basis (Song, 1998).
China's continuing impact on the world economy lands in developed countries that include Hong Kong, Europe, Japan, and Australia have no choice but to deal with the very real potential of a decline in export activities. However, what offsets these negative are lower commodity and oil prices, along with lower interest rates, which provide hope of a boost in the global financial world.
currency status as a result of the China-US trade relationship. Journal of Global Business and Technology, 10(2), 43-59. Retrieved from Business Source Complete
In addition, the future exchange rate can lead to decrease Tiffany 's profits because the yen is thought to be overvalued in comparison to the dollar. These risks are fairly serious because the extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be.
...f you know that currency that you are dealing with fluctuates by about 3 percent per year to USD, then you could easily charge 3 percent more for the product or services you offer in that country, in the USA particular to my example. By charging 3 percent more, you will get a baseline price if the currency will decline by 3 percent, and if the currency declines less than 3 percent ,the company will get an extra income. No one knows the best practices on how to mitigate the exchange risk, but still every company has some strategies that they can implement to decrease the risk and increase the profit. Overall, the foreign currency exchange risk is just something that every business should be able to deal with in a global economy, as long as they are not afraid to accept strategies that sometimes will take a little longer to see the results or they can failed in fact.
According to Deloitte Research article "Managing in the face of exchange rate uncertainty: A case for operational hedging." Operational hedging is a strategy designed to manage risks through operational means that provides companies with flexibility in supply chains, financial positions, distribution patterns and market-facing activities to allow dynamic adjustments at the locations used to manufacture, source, and sell its products. (Deloitte Research 2006) With U.S. deficit climbing the U.S. dollar’s value is falling in the world market and with China’s renminbi gaining momentum, against the dollar contributes to the uncertainty about its future market value. According to the Deloitte Research article; "despite its measures to revalue the renminbi against the U.S. dollar, international and
Under the linked exchange rate system, the Hong Kong dollar is linked to the U.S. dollar at the rate of HKD 7.8 to USD 1. Unlike the fixed exchange rate regime implemented in other economies, under the linked exchange rate system, the government or the de facto central bank of Hong Kong, HKMA does not actively interfere in the foreign exchange market by controlling the supply and demand of the Hong Kong dollar in order to influence the exchange rate. According to John Greenwood (2008), the linked exchange rate system is a currency board system, which requires both the stock and flow of the monetary base to be fully backed by foreign reserves. This implies that any change in the monetary base is fully matched by the corresponding change in foreign reserves at a fixed exchange rate. According to the HKMA, the monetary base of Hong Kong is made up of the following four components: 1). Certificates of Indebtedness; 2). Government-issued notes and co...
The massive increase in the Chinese trading relations was fueled by the United States in the year 1979 through the normal trade relations between the two countries. In addition, the Chinese non-concession to the World Trade Organization (WTO) in the year 2001 also facilitated its trading activities with different countries including the United States (Kaplan, 57). However, trading relations with the Chinese have been uneasy resulting from the massive trade imbalances in the recent past, which grows exponentially. The protectionist policies of the United States especially in Washington and Beijing have been putting pressure on the Chinese to revalue their currency as well as protecting it from counterfeits, which may be of adverse effects to the trading relations. This paper gives a comprehensive discussion on the foreign trade relations with china. It further gives an elaborate discussion on the impacts of foreign tr...
Xingzhong, LI Daokui David YIN. "The International Monetary System in the Era of Post-Financial Crisis: What Policy Options Does China Have?[J]." Journal of Financial Research 2 (2010): 005
... currency is in USD. If Bitcoin meets its expectations and pulls the rug from under the USD as a leading choice for a reserve currency this will severely affect the US economy and its status as one of the most powerful countries in the world.
market high, China needs the RMB to stay at a low price, so the government interfere in
Despite the fact that recent reports have shown that the Chinese currency is currently facing descending pressures, it is, however, likely to improve in the future because of the enhanced terms of trade, current account surplus that is growing, and high net saving. Another reason that will make the Chinese RMB to do well in the future it is because the currency has solid fundamentals and the economy of the country is significantly increasing at a higher rate than the GDP rates. Due to the growing Chinese economy to being the second largest economy, the Chinese currency yuan has been acknowledged by the International Monetary Fund (IMF) as a major global
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During this period, global consumer price inflation presented a trend of fluctuation reduction. According to World Bank data (2015), world real GDP growth slightly which is from 2.4 to 3.3 in 2012-2016. Moreover, weaker investment environment lead to the job creation rate decrease of 1.4% every year after 2011, the unemployment rate is high correspondingly (world economic situation prospects 2016). Industrial commodities like energy, metals and minerals both decline more than 35 each from the beginning of 2011 to the end of 2014 and this trend will continue (World Bank 2015). Meanwhile, China as the world’s largest exporter and the second largest importer country, economic growth becomes slowing than before (Chen 2016). It has the significant impact on the global trading environment. At the same time, global trading volume
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