US Domestic Actors and China Yuan/Dollar Exchange Rate

Report
Chinese Yuan/Dollar Exchange Rate:
A Historical Review and Future
Perspective
Yong Cao, Ph.D.
Rashmi Prasad, Ph.D.
University of Alaska Anchorage
World Trade Center Alaska
November 02, 2011
China Yuan/Dollar Exchange Rate
Why it is important:
• Influence China’s purchasing power
– The customers in China will have higher purchasing power
with Yuan appreciation
• Influence American consumer’s social welfare
– Consumer good in major us retailers will be more expensive
with Yuan appreciation
• Influence the global financial markets
– Speculation of Yuan appreciation will cause in-flow of large
amount of foreign currency
• Currency Exchange Rate Oversight Reform ActOctober 03 2011
– Controversial
– Positive vs. negative for different actors
Yuan vs. Dollar: A Historic Review
Period 1: Before 2002
Fixed rate pegged to
dollar with
8.277RMB/dollar
without U.S.
engagement
•Annual debate in the U.S. Congress over
renewing “most favored nation” status to the
PRC before China became WTO member on
December 11, 2001
Period 2: 2002-October 2003
RMB pegged to
dollar with 8.277
RMB/dollar with
increasing
pressure from
United States
•Senator Schumer introduced the first
Congressional bill targeting RMB value in 2003
•Talks between high-level officials (including
the president) to prioritize a flexible RMB
policy
•Mobilize supports from other countries on
RMB flexibility
Period 3: October 2003-July 2005
RMB pegged to dollar with
8.277 RMB/dollar with
increasing pressure from the
United States, and China
started to change its fixed
system to a float system
•Joint committee between U.S. and China to change RMB from
fixed system to float rate system
•More legislators involved, backed by Union and other NGOs,
congressman Bernie Sanders and others moved to withdraw
normal trade relations treatment on 9 February 2005
•U.S. hedge funds started to enter China’s market on a large scale
Period 4: July 2005-July 2008
On 21 July 2005,
the RMB peg was
lifted; RMB
started to
appreciate from
8.277 to 6.83
RMB/dollar
•In 2006, two U.S. senators co-sponsored a bill to
impose high tariffs on Chinese products if the
country did not let the Yuan rise
•The Fair Currency Alliance hired a Washington
law firm to prepare a Section 301 petition
•More U.S. hedge funds involved in China’s
market
Period 5: August 2008-December 2009
Float rate within
the narrow band of
6.81-6.838 without
pressure from the
United States
•The U.S. focus shifted to receive support from
China to resolve its domestic financial crisis
•China became the 2nd largest holder of U.S. treasury
bonds in 2008
•The RMB issues were put aside for the time being
Period 6: December 2009-July 2010
Float rate within a narrow band
of 6.828-6.838 with more
pressure from the United States
•Increasing pressure from U.S. for China to have
more flexible exchange rate system
•Threat to label China as a currency manipulator
Period 7: July 2010-Present
RMB started to
appreciate from
6.82-6.45 RMB
•Increasing pressure from U.S.
•U.S. military exercise in the Yellow Sea
•China adopted a more flexible system
•More U.S. hedge funds involved in the Chinese market
The Negotiation Strategies and Interactions
between China and the United States
Will stronger Yuan reduce the
U.S. trade deficit?
[T]here is little evidence that a stronger
yuan would reduce the U.S. trade deficit
with China or improve the jobs picture.
-----by James A. Dorn, Forbes.com on October 4,
2011.
Major US manufacturers and
retailers do not support
Currency Exchange Rate
Oversight Reform Act
• Boeing
• Apple
• Wal-mart
Will stronger Yuan force
global firms to move
manufacturing function back
to US?
The major reason behind the
global manufacturing firms to
stay away from US
• The legal environment
• The legal cost
• The government’s different attitude
towards business operations
Eugene Smith Grant Photography for
Humanistic Award Winner-- Lu Guang
Jiangsu-Taixin
Henan-Anyang
Zhejiang--Xiaoshan
Guangdong-Shantou
Jiangsu--Changshu
Hebei-Shexian-Tianjin
Who will be the winner in this
game?
• US-based hedging funds
• US-based exporters
• Upper class in China
– 15% already immigrated to overseas
– 40% more are doing now
• Investors who are the early entrants in
China’s market—particularly before 2008
• Labor-Union?
Who will be the loser in this
game?
• Global-Capital Intensive Manufacturers.
– (e.g. Gen Electric)
• Global-Labor-Intensive manufacturers.
– relocate to Vietnam, Mexico. Central America,
and Bangladesh
• Local Manufacturers
• Importers who import goods from China
• US consumers
Future perspective
• Election syndrome
• RMB’s globalization
Q&A
?

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