Renminbi Our Currency, Is It Your Problem

Topics: China, People's Republic of China, Luxury good Pages: 5 (1440 words) Published: March 27, 2013
China’s Renminbi: “Our currency, Your Problem”?
China in the last century has gone through many dramatic changes. 35 years ago there would not even be talk about China’s currency because under Mao ZeDeng all trading with China had to be through the British colony of Hong Kong. Now China has opened up its economy and allowed many companies to privatize. The problem facing China and U.S. relations revolve mostly around two main elements; trade deficit, and currecy. The most important cultural aspect which must always be in the back of one’s mind is that China is still under a communist rule, meaning that the government has more control of businesses and industries then many of the countries which the US handles trades.

At the moment, the American government has made it clear that it has concerns about the Chinese government interfering with its currency, specifically undervaluation the 人民币 . Under a new law that was passed in 2011, if a countrie’s currency is determined to be a “currency manipulator” then the Obama administration can take legal action against China. “Chinese officials… threatened a trade war”[1] when they learned that the United States Congress was trying to pass this bill. This is a small example of the tensions between the US and China because of currency.

If there were to be a revaluation of the Yuan, which would lead to an appreciation of the currency there will be major effects in China’s business. China is a country where 33% of its GDP (2012) is manufacturing, the highest in the world. [2] Most of their manufacturing comes from foreign companies who move their plants to China to produce goods at a lower cost. This lower cost comes from the exchange rate between these Western countries and China, which favor the developed countries. With China’s currency stronger, these developed countries get less money for their currency, thus making goods more expensive. Consequently on the other side, goods produced outside China, like in Germany or the United States would be less expansive then before the revaluation. With the cost of manufacturing increasing, China may lose business with all these foreign companies whose reason for moving manufacturing in China was lower costs. Another problem that China will face with an appreciated Yuan is the effect it will have on the Chinese US treasury bonds. Along with the huge trade deficit, China holds a lot of US treasury bonds, because when China’s market was first opened up, many of the Chinese believed America to always be stable. With the low interest rate and the appreciation of the Yuan, China will not be making as much, if any, off of the bonds. Once more and more Chinese begin to figure that out, less will buy US treasury Bonds. Since China owns a majority of US debt, if China stops buying debt from the US then the US will lose a huge intake of cash flow. [3]

With a revaluation of the Yuan, many goods that are made in China will increase in price. This will cause some companies that produce low-cost products, to move their manufacturing to countries that are cheaper to do business with. Meanwhile, with a growing middle class in China, more will be able to afford goods that for example, are made in America, thus, exporting to China will be cheaper. This change in trading may help with the US and China trade deficit; even though there will still be a deficit because of the bonds China holds, it will be more balanced then before.

With regards to imports and exports in China, a revaluation should cause the goods from Western countries to be cheaper in China; however, China has a double taxation on luxury items. For brands like Nike, they will not be more expensive, but for brands like Ralph Lauren, Cartier, Channel, their products will be even more expensive because the Chinese government will tax them again more heavily, in order to try to promote their own luxury brands. Since most of these Western countries produce high luxury goods, this is not good...
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