Question 1: Impacts of an Appreciating Currency

The renminbi An Introduction

The renminbi (RMB) is the official currency of the Peoples Republic of China. The Yuan () is the basic unit of the renminbi, and also used as a synonym of the currency, especially in international markets. The currency is issued by the People's Bank of China, the monetary authority of China. Until !!", the #alue of the renminbi $as pe%%ed to the U.&. dollar. &ince then, as China pursued a transition from central plannin% to a market economy, and increased its participation in forei%n trade, the renminbi $as de#alued to increase the competiti#eness of Chinese e'ports. (t $as claimed, pre#iously, that the R)* e'chan%e rate $as under#alued by +,."- a%ainst its purchasin% po$er parity.

The Rise
Under pressure from its ma.or tradin% partners, China mo#ed to a mana%ed pe% system and be%an to allo$ the R)* throu%h a %radual appreciation o#er three years. (n /uly !!0, China stopped the appreciation of R)* due to the effect of the economic recession. 1rom /uly !!" throu%h /une !2+, the R)* appreciated by +3- on a nominal basis a%ainst the dollar and by 3 - on a real (inflation ad.usted) basis.

Wh is it so important!
The R)* is so important a currency because China, currently the
nd

lar%est

economy, is a #ery important country and bein% the lar%est manufacturin% economy in the $orld, anythin% that affects its economy has %lobal implications. The R)* is currently the 0th most traded currency in the $orld and not unrealistically it may e#en become a reser#e currency in the future.

GMBA-13, Monetary and Fiscal olicy - Group Assignment

age 2

"conomic Winners and #osers

This scenario has created many $inners and many losers. (ndustries that $ere focused on e'portin% products and ser#ices $ere primarily hit e'cept $here a lar%er portion of their inputs ha#e to be imported. 4o$er production costs and reduced cost of final product (by a %reater factor than their increase due to the currency appreciation) %i#es an o#erall net positi#e result. Winners "lectronics Manufacturin$% Automoti&e ' Aeronautical

Manufacturin$% "ner$ 5lectronics 6 4ar%est contributor to the increase in Chinese e'ports is the electronics manufacturin% sector. 7ithout the surprisin% increase in electronics e'ports (U&8 "039.2million), total e'ports $ould actually decrease by around U&8+!!! million. The key to this sector %ro$in% a%ainst the trend is the amount of imported inputs in this sector. : stron% R)* facilitates cheaper imports thereby substantially reducin% production costs. :utomoti#e and :eronautical6 : more e'pensi#e R)* increases costs in China, but it also reduces the prices of imported components and materials;$hich account for about "!- of the costs for after6market spare parts manufactured in China. #osers Te(tiles% Chemical Manufacturin$% )hip Buildin$ )any industries that $ere e'port oriented like te'tiles, chemical manufacturin%, $ere hit by the risin% R)* in addition to risin% production inputs and labor costs. This reduces competiti#eness in the international markets and eats si%nificantly into profits. Te'tiles <)any Chinese te'tile e'porters $ere hit by R)* appreciation as early as !!9 and $ith profit mar%ins as lo$ as +- it $as difficult for them to absorb the cost of the risin% R)*. Chemical )anufacturin% < (ncreased cost of the final product due to the e'chan%e rate makes the product $eaker a%ainst competition in the international markets. (n

GMBA-13, Monetary and Fiscal olicy - Group Assignment

age

markets $here the cost has been a ma.or sellin% point Chinese firms $ill be hit e#en harder.

Conclusion * Is it in China+s interest to appreciate! 1or China, a country that $ants to look at a more fle'ible e'chan%e rate system, increased fle'ibility under the conditions pre#ailin% today and durin% most of the period since !!+, $ould imply appreciation. To understand $hether appreciation $ould help, the reasons to consider are=

>#erheatin% 5'cessi#e reser#e accumulation 4on%6run need to use the e'chan%e rate for e'penditure6s$itchin% :#oidin% future crashes. 4o$ price le#el by international standards.

7hile the discussion abo#e has outlined some of the $inners and losers, the %reatest beneficiary from a %radual R)* appreciation, accompanied by measures to stimulate demand, $ill be China itself. Considerin% the on%oin% process of urbani?ation and re%ulatory reforms, the Chinese economy still has %reat momentum. (f the Chinese %o#ernment stimulates consumption in the domestic economy the Chinese can use this momentum to build a more balanced economy $hile pushin% their offerin%s up the #alue chain.

GMBA-13, Monetary and Fiscal olicy - Group Assignment

age +

65@A >1 A>CU)5@T6

GMBA-13, Monetary and Fiscal olicy - Group Assignment

age 3