Whether china should revalue Yuan 1.Introduction
Since the economic reform started in 1979, the Chinese currency (yuan) had been devalued several times until 1994.While the official rate of yuan had been maintained constant over several years, the preure on the revaluation of yuan intensified.It has been perceived by some economists that the yuan is undervalued on an order of 15 to 35%.After years of speculation and hearsay, China finally revalued the yuan by 2.1% in July 2005.However, the iues on whether, when and to what extent the official rate of the yuan should be further revalued remain unsolved.The future direction of the yuan, including the poibility of shifting towards a floating exchange regime, has attracted considerable international attention not only from policy makers and academics, but also from the busine world.2.Analysis: S.W.O.T.2.1 S (strengths):
2.1.1 Cheaper imports: With the recent industrialization, there has been a large increase in machinery and metals.In the past year, we have seen large rises in oil, copper, and steel prices.A stronger yuan would help to offset some of the recently higher prices paid for these vital imports. 2.1.2More expansion and investment overseas: One of the le obvious consequences of a stronger yuan, and synonymously, of greater purchasing power, would be an increase in Chinese firms\' investment and expansion abroad.Increasing sales abroad is eential for Chinese companies who will be facing stiffening competition.The government has done its best to ease the financing of such projects, and investments would be better encouraged by strengthening the yuan than through inefficient loans. 2.2W (weaknees): 2.2.1 Hard Landing Stops Growth: The Chinese economy is heavily export-dependent, and the nation still requires strong output growth to find jobs for millions of underemployed people in rural areas.A stronger yuan would make Chinese goods more expensive to foreign purchasers, curtailing the quantity of output demanded and ultimately hurting exports.A drop in revenue would make it more difficult for Chinese firms to turn profits and if they were to respond by firing current employees or by no longer hiring new ones, the unemployment rate would surge.
2.2.2 Increases Value of Non-Performing Loans in Banking Sector: Although a revaluation of the Yuan reduces the foreign debt obligations of the government, it increases the risk for default on non-performing loans for the country\'s banking sector.As a result, the Chinese economy may not be ready to let go of its pegged yuan safety blanket.China\'s banking system has a significant amount of non-performing loans and although there has been a mobilization to solve this problem.Chinese government has maive amounts of US dollar aets, which they used to peg the yuan.These aets will lose value in proportion with the revaluation of the yuan.
2.2.3 Reduces Foreign Debt Obligations: Revaluing the Yuan helps to reduce some of China\'s dollar denominated external debt obligations.China currently owes approximately $180 billion of external debt, the value of which will be reduced by the amount of Yuan\'s appreciation in real terms against the major currencies especially the dollar.2.3 O (opportunities): 2.3.1 Revaluation May Force Chinese Economy to Become More Productive: China\'s economy is currently exceively export oriented which can be dangerous.By letting its currency revalue, China will not only be able to diversify its economy to a more balanced mix of domestic and export industries, but it will also make the export sector more productive.By forcing industry to compete on quality rather than allowing it to obtain a competitive advantage mainly as a result of lower currency, the Yuan revaluation will make Chinese manufacturers much more productive and efficient.2.3.2 Revaluation May Raise the Stage of China: If China wants to become more influential on the global financial stage it will need to lay the foundation for the Yuan to emerge as a global currency.Yuan revaluation would help China\'s economy become more productive and reduce reliance on exports for growth.This means Yuan revaluation at some point seems inevitable.2.4 T (threats): 2.4.1 Immature Markets - Disastrous for Firms: China\'s financial markets, which are too new and immature, cannot handle a quick revaluation.a vast majority of Chinese firms have had little to no experience with hedging.Currency risk is a concept that is foreign to these companies especially since, for the past 9 years, it was not a pertinent concept to them at all.If the Chinese central bank revalued suddenly, it would be disastrous for the countle number of financially unsophisticated firms. 2.4.2 Influx of Speculative Money Will Increase Volatility: there has been a huge foreign capital influx into China recently.Once the revaluation occurs too slowly, it may just be a signal to hesitant investors that more appreciation is to come.If the pace is too fast, too many funds may leave at once.Depending on the revaluation rate, many investors may not want to remain invested after a revaluation.3.Conclusion
A significant revaluation of the yuan brings adverse economic impact not only to the Chinese economy but also to the rest of the world.According to the results, the revaluation of yuan would not be appealing to the Chinese.To some extent it would further reinforce the deflation, reduce the competitivene of China’s exports and the growth of GDP.As a result, some additional policies, such as an expansionary fiscal policy may need to be undertaken simultaneously to remove some of the adverse impacts of the yuan revaluation, should the revaluation be inevitable in the near future.
The conclusion generated from the experiments should be accepted with great caution.This is because firstly the data, variables and equations are relatively limited for China.This may lead to over-estimation of the price link effect.Maybe a feasibility of a gradual and moderate revaluation of le than 10% in a period of three years, or 4% per year over a decade will be good if the Chinese authorities have determined to make the yuan a convertible currency in the future.
