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.
Federal funds rate has risen the fifth time in 1994 on Nov 1994 and reaches 5.5%. This resulted in stronger dollar against peso as the quantity of US dollar reduced. This signaled problems for Mex...
China’s acquisition of a significant foods company and its joint venture with the Artal Group starts back to the beginnings of the global economic crisis and the worldwide food shortage. As European and American assets decreased significantly, the Chinese renminbi has been greatly appreciated against the American dollar. Throughout its economi...
On the other hand, there are disadvantages to weakening dollar. The weak dollar is bad for American citizens. Weaken dollar lifted import price. Consumers face higher prices on foreign products or services.
One would suppose that the United States is perhaps under the same disaster as the Roman Empire and Han Dynasty, who are possibly the two most powerful groups to ever live. Although the story given about U.S. economy collapsing may not be closely related to the Roman Empire incident, but being in huge debt could lead to a another crisis. All in all, Roman Empire and Han Dynasty will long live forever as the greatest empires in the history of the
China has come a very long way in the past 25 years. China has grown at nearly 10 percent a year over the past 20 years. China's explosion on to the world investment, production and trade scene is the product of its size, growth and openness. This is leading to tremendous changes in the global economy.
In 1978, China was positioned 32nd on the planet in export volume, yet it had multiplied its reality exchange and got thirteenth biggest exporter in 1989. Between 1978 and 1990, the normal yearly rate of exchange extension was over 15 percent,[11] and a high rate of development proceeded for the one decade from now. In 1978 its exported on the in the world of the overall industry was insignificant, in 1998 regardless it had short of what 2%, however by 2010, it had a world piece of the overall industry of 10.4% as stated by the World Trade Organization (WTO), with stock fare offers of more than $1.5 trillion, the most astounding in the world.
The business reason that led for China Noah’s potential currency exposure is the fact that the company wanted to shift its business of procurement of wood to Indonesia. The procurement that was to be moved to Indonesia was to be that of a large portion of raw materials. The company wanted to shift its procurement to Indonesia because the country had abundant wood resources, and since the market of the supply of tight wood was increasing in China every year the company had to look for more, raw materials. The company
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
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
From the 1970s, there has been a wave of liberalization in China, which was introduced by Deng Xiaoping. This is one of the key reasons to the rise of China to be one of the economic giants in the world. In the last 25 years of the century, the Chinese economy has had massive economic growth, which has been 9.5 percent on a yearly basis. This has been of great significance of the country since it quadrupled the gross domestic product (GDP) of the country thus leading to saving of 400 million of their citizens from the threats of poverty. In the late 1970s, China was ranked twentieth in terms of trade volumes in the whole world as well as being predicted to be the world’s top nation concerning trading activities (Kaplan, 53). This further predicted the country to record the highest GDP growth in the whole world.
The current trade imbalance is caused in large part by intrinsic features of China's labor market and consumer base. The vast majority of China's 1.3 billion people still live in rural areas. China has, by some estimates, a surplus rural labor force of 120 million people, many of whom migrate to industrial centers to look for factory work, and drive down wages. As long as wages are low, the United States will continue to gobble up products made in China, while Chinese consumers will prefer to buy cheaper, homespun alternatives to American products. The rise in trade deficit with China has come at a cost to jobs in the United States, accordin...
Floating exchange rate which is also known as fluctuating exchange rate or flexible exchange rate is an exchange rate regime where its currency is determined by foreign exchange market forces such as demand and supply of that currency relative to other currencies.
According to The Star Online, up to 80% of the total group borrowings of RM7.49 billion were denominated in US dollar. Simultaneously, 8% of the total group borrowings were denominated in Euro currency. In other words, the total debt of the group that denominated in US currency worth at US$1.33 billion, approximately cost at RM5.91 billion. The total debt that denominated in Euro currency cost around €129.8 million, approximately cost at RM610.61 million. The high composition of debt in foreign currency caused the group extremely vulnerable to foreign exchange risk. A sensitivity analysis conducted by CIMB Research revealed that IOI could face RM148 million of loss or gain for foreign exchange translation risk with every RM0.10 rise/drop in Ringgit to US dollar exchange rate. Due to substantial losses on foreign exchange translation and fair value loss on derivative loss, the company predicted that the second quarter net profit of 2017 will be dropped by 98% to RM15.6 million, compared to the first quarter net profit recorded at RM703.7 million (Kok, 2017). Thus, foreign exchange risk is considered as high risk for
For the forecast, the PBC will adapt to the dynamic economic environment, to ensure the policies continuity and stability, maintain the prudent monetary policy and continuing a moderate elastic scope (China Monetary Policy Report 2015). In addition, Chinese government will remain a more proactive fiscal policy. They will moderately increase the financial deficit and preparing to make the biggest reform in the policy and avoiding the fiscal cliff, especially focus on the tax system and expand the effectiveness of government’s expenditure (Cevik and Carolina-Caro 2015). Meanwhile, China will strengthen the coordinate of monetary and fiscal policies, which stabilizing the Chinese economic
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