Revaluation of Chinese Yuan
| Revaluation of Yuan | | | 2/16/2011 | A mini case study | | Prepared by Angela AgostinacchioAmerican University of DubaiSpring : International Finance Management2011 | | |
Revaluation of Yuan
synopsis
On 21st July 2005, Sun rose from the east with shocking news. China government and People’s Bank of China officially changed the value of their currency and thus removed its peg with US dollar. Prior to the revaluation, $1 U.S. dollar bought 8.27 Chinese Yuan. After the revaluation, $1 U.S. dollar buys only 8.11 Chinese Yuan. This decision happened mainly due to the high pressure from US government in order to control growing Chinese trade surplus with US. However China argued that, this trade surplus with US is happening due to change in global economy and cost of production. In the end China agreed to revoke their peg with US Dollar to a managed float by 2.1%, a much small change than 10% to 20% suggested by US government. Since China economy is an integral part of Asian economy, other South East Asian countries were also forced to take immediate actions in order to maintain competitive balance with in the region. Since China being the base of global manufacturing source, many multinational companies also got affected with new floating rate of Yuan. Many company’s lost their profit margins due to the same and on the other side, companies which does not had manufacturing base in China benefitted from the same with their import.
problem formulation
US economy is struggling to maintain their bilateral trade deficit with China due to undervalued Chinese Yuan. As a result of undervaluation, China’s foreign exchange reserve swelled to over $700 billion in 2005. Due to these issues US insisted China to reevaluate their currency between 10 and 20 percentage or else US will be forced to implement protectionist legislation.
Reason behind trade surplus
For past 10 years Chinese currency was pegged with US
Revaluation of Yuan
synopsis
On 21st July 2005, Sun rose from the east with shocking news. China government and People’s Bank of China officially changed the value of their currency and thus removed its peg with US dollar. Prior to the revaluation, $1 U.S. dollar bought 8.27 Chinese Yuan. After the revaluation, $1 U.S. dollar buys only 8.11 Chinese Yuan. This decision happened mainly due to the high pressure from US government in order to control growing Chinese trade surplus with US. However China argued that, this trade surplus with US is happening due to change in global economy and cost of production. In the end China agreed to revoke their peg with US Dollar to a managed float by 2.1%, a much small change than 10% to 20% suggested by US government. Since China economy is an integral part of Asian economy, other South East Asian countries were also forced to take immediate actions in order to maintain competitive balance with in the region. Since China being the base of global manufacturing source, many multinational companies also got affected with new floating rate of Yuan. Many company’s lost their profit margins due to the same and on the other side, companies which does not had manufacturing base in China benefitted from the same with their import.
problem formulation
US economy is struggling to maintain their bilateral trade deficit with China due to undervalued Chinese Yuan. As a result of undervaluation, China’s foreign exchange reserve swelled to over $700 billion in 2005. Due to these issues US insisted China to reevaluate their currency between 10 and 20 percentage or else US will be forced to implement protectionist legislation.
Reason behind trade surplus
For past 10 years Chinese currency was pegged with US