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IMPACT OF CHINESE EXCHANGE RATE POLICY ON US DOLLAR

Presented by:

Prashantha Poojary

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Introduction Exchange rates are important because they enable us to convert

different countries’ prices into comparable terms.

An exchange rate is the price of one currency in terms of another, is

a relative price, and also an asset price.

Foreign exchange rate is the price of some foreign currency

expressed in terms of a home currency.

Exchange rates are determined in the same way as other asset

prices.

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China's exchange rate policy China’s exchange rate is being controlled by government authorities:

the People’s Bank of China manages the value of the Renminbi.

The Yuan was pegged to the greenback at 8.28 to the Dollar for

more than a decade starting in 1994.

China believes such an exchange rate policy is required to sustain a

high growth rate.

China views its focus on exports as one of the primary means of

achieving its long-term growth objectives. 

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China's exchange rate policy Criticism

A necessary by-product of fixing the exchange rates is capital controls.

China’s currency policy claim that the undervalued Yuan exacerbates global

imbalances and costs jobs.

The low Yuan encourages over-investment in China’s export manufacturing sector

at the expense of the domestic market.

The undervalued currency makes imports into China more expensive and out of

reach for the ordinary citizen.

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Pros and Cons Undervalued Yuan Related To USA

A. Pros USA consumer access to cheap manufacturing goods and thereby lowering their

expenses and cost of living.

USA government fund its budget deficits and keeps bond yields low.

B. Cons Low Yuan makes USA exports into China relatively expensive and USA export

growth and will therefore widen the trade deficit.

Led to the permanent transfer of hundreds of thousands of manufacturing jobs

out of the USA

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Implications of Yuan Revaluation China’s currency to appreciate it may encourage global rebalancing.

Yuan revaluation cause Chinese exports uncompetitive.

The flood of cheap imports into the USA would slow down.

Improving its trade deficit with China.

May do little to stem the exodus of USA manufacturing jobs.

Move from China to other lower-cost jurisdictions.

Currency controls as China moves toward a freely convertible currency.

Trade war between the world’s two biggest economies.

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CONCLUSIONS

Renminbi appreciation appears to impact foreign firm valuations both through a

general market-sentiment effect.

It reduced Chinese purchases of foreign treasury bonds.

Fears of trade sanctions and retaliation, and specific trade-related channels.

It creates political uncertainty in the global economy.

Sudden Yuan revaluation, since an overnight 10% increase in the currency would

transfer into a $130 billion notional loss on China’s US dollar.