China, float or not
1. What are the implications of China’s exchange rate policy on doing business with and “against” China?
Since July 21, 2005, China has adopted a managed floating rate regime based on market supply and demand with reference to a basket of undisclosed currency. The daily trading price of the U.S. dollar against RMB in the foreign exchange market will be allowed to float within a band of +/->0.3% around the central parity published by People’s Bank of China. The signal was initially interpreted by the international market as an indication that China would embark on a gradual shift toward increased flexibility which eventually adopt a floating exchange rate regime where the RMB will appreciate much against US dollar. However, they soon realized that China was still extremely cautious in adopting a fully floating exchange rate system and provided very limited flexibility on the exchange rate system. The Chinese government and central bank was striving to maintain the RMB exchange rate at a stable and equilibrium level. According to some studies who advocate RMB revaluation, the current RMB/USD exchange rate is undervalued by 35% based on the price level of goods and services in China compared with those of its trading partners. The current managed floating rate regime adopted by Chinese government has undoubtedly a great impact on countries and corporations doing business with China & Chinese companies and/or competing against with them in the international market.
Countries & Companies doing business/partnering with China. The “undervalued” RMB will create a competitive advantage for those who manufacture their products in China by leveraging the relatively cheaper raw material as well as labor in the China market and export them in other markets to generate greater profits. As specified in the case, Wal-Mart for example, imports from China reached $18 billion in year 2004 responsible alone for almost $10 billion of the US deficit with China. However, the
Since July 21, 2005, China has adopted a managed floating rate regime based on market supply and demand with reference to a basket of undisclosed currency. The daily trading price of the U.S. dollar against RMB in the foreign exchange market will be allowed to float within a band of +/->0.3% around the central parity published by People’s Bank of China. The signal was initially interpreted by the international market as an indication that China would embark on a gradual shift toward increased flexibility which eventually adopt a floating exchange rate regime where the RMB will appreciate much against US dollar. However, they soon realized that China was still extremely cautious in adopting a fully floating exchange rate system and provided very limited flexibility on the exchange rate system. The Chinese government and central bank was striving to maintain the RMB exchange rate at a stable and equilibrium level. According to some studies who advocate RMB revaluation, the current RMB/USD exchange rate is undervalued by 35% based on the price level of goods and services in China compared with those of its trading partners. The current managed floating rate regime adopted by Chinese government has undoubtedly a great impact on countries and corporations doing business with China & Chinese companies and/or competing against with them in the international market.
Countries & Companies doing business/partnering with China. The “undervalued” RMB will create a competitive advantage for those who manufacture their products in China by leveraging the relatively cheaper raw material as well as labor in the China market and export them in other markets to generate greater profits. As specified in the case, Wal-Mart for example, imports from China reached $18 billion in year 2004 responsible alone for almost $10 billion of the US deficit with China. However, the