China in 2005 - The Yuan Revaluation and Beyond
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Case Code: ECOA137 Case Length: 12 Pages Period: - Pub Date: 2005 Teaching Note: Not Available |
Price: Rs.300 Organization : - Industry : - Countries : China & World Economy Themes: - |
Abstract Case Intro 1 Excerpts
Excerpts
China & the Global Economy
In the recent past, China's dramatic effect on the world economy had been discernible. China's growing influence went beyond exports of cheap goods. China was having a major impact on the relative prices of labor, capital, goods and assets in a way that had never happened before. China's rapid economic development was not just a powerful driver of global growth. Its impact on other economies was also far widespread and visible. China through its heavy exports had contributed significantly to America's trade deficit. The reserves accumulated had been invested in American securities. By holding down bond yields, China had fuelled excessive household borrowing and spending in the US. 'The Economist' had pointed out that global monetary policy seemed to be made in Beijing and not in Washington...
The Yuan Revaluation
China's decision on 21st July 2005, to revalue its currency upward by 2.1 per cent and scrap its peg to the US dollar in favor of a managed float marked the first change in the value of the renminbi (RMB), or Yuan, since 1997, when its rate was set at 8.28 to the dollar. PBC stated that it would allow the RMB to trade within a band of 0.3 per cent for the first time...
The Global Implications
The Yuan revaluation might have a major impact on the international monetary system. As an academician commented : "It may be the beginning of the unravelling of the so-called Bretton Woods II regime, a regime that has allowed, until now, the cheap financing of the US 'twin' deficits (budget and trade)."...
The Road Ahead
Opinion remained divided on the long term impact of the Yuan revaluation. If abandoning its dollar peg caused China to reduce its purchases of T-bonds, then yields would rise. But this depended on several uncertainties...
Exhibits
Exhibit 1: China
Exhibit 2: China's Economic Indicators
Exhibit 3: China's Economic Indicators (Projections)
Exhibit 4: China's Foreign Trade
Exhibit 5: Merchandise Exports to and Imports from China 2003 ($ billion)
Exhibit 6: China's Exports, % of World Total
Exhibit 7: Major Foreign Holders of Treasury Securities
Exhibit 8: Yuan Shift China - One Year CNY/US$ NDFs
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