Exchange Rate China USA

7/27/2019 Exchange Rate China USA

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ECN 5050- SPRING 2013

Maria BaquerizoFadwa TalaouiRida BouchoutrouchManuel Lemus


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Outline Introduction

Relationship Between US and

Chinas Economy The Effect of Chinas Devaluated

Currency on US Economy

Conclusion


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Introduction


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What is a currency devaluation? Currency devaluation is a condition in international

affairs where countries compete against each other toachieve a relatively low exchange rate for their owncurrency.

As the price to buy a particular currency falls so toodoes the real price of exports from the country.

Imports become more expensive, which can harmcitizens' purchasing power.

Domestic industry and employment receive a boostfrom both domestic and foreign markets.


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Definition of the Exchange Rate The price of one country's currency expressed in

another country's currency. In other words, the rate atwhich one currency can be exchanged for another.

Illustration An interbank exchange rate of91 Japanese yen (JPY, ) to

the United States dollar (US$) means that 91 will beexchanged for each US$1 or that US$1 will be exchangedfor each 91. Exchange rates are determined in theforeign exchange market


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Definition of the Foreign Exchange

Market The market in which participants are able to buy, sell,

exchange and speculate on currencies.

For example, a typical foreign exchange transaction willinvolve a party purchasing some quantity of onecurrency by paying some quantity of another currency.

The big players in the foreign exchange market arebanks, large commercial entities hedge fund,investment firms and nations central banks.


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What is a currency devaluation?A currency devaluation occurs when a country

allows the value of its currency to drop inrelation to other currencies.

If a currency value drops, then: Exports will become less expensive Imports will become more expensive to people living

in the countryDecreases the trade deficit.

By selling its own currency and buying up foreignreserves like the U.S. dollar, China has essentiallypegged the Yuan's value to the dollar instead ofallowing it to move freely in foreign exchange

markets.


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What's so great about a cheaper

currency?A weak currency cheapens the price of a country's

exports, making them more attractive to internationalbuyers by undercutting competitors.

It boosts the domestic economy since the country reliesmore on its production to satisfy its needs.

China's economy is primarily export-driven, so havinga leg up on the international competition has allowedits economy to grow at high speed.


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What's wrong with that? Several industrialized nations, including the U.S.,

think China's explosive growth is unsustainable, andbad for the global economy. They fear its rapidinflation could ripple through the rest of the world,driving up the price on goods at a time when othereconomies are still struggling to get back on their feet.

Rapid growth has also led to fears that China'seconomy could overheat, and then crash land into amassive slowdown, hindering the world recovery.


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Is the Yuan Undervalued?

The IMF as well as some academic studies support that theYuan is being undervalued between 30 and 50%.

There are strong opinions that claims that the Chinesecurrency is undervalued. Some measurements thatsupport such claims are the popular "Big Mac Index

The Big Mac Index, measures the prices of a Big Macburger in McDonalds around the world adjusted forexchange rates. A Big Mac in China in July 2012 costs anequivalent of only $2.45. The average price in the UnitedStates is $4.33. This implies that the Chinese Yuan isundervalued by a little over 40% based on purchasingpower parity.


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The Big Mac Index, measures the prices of a Big Mac

burger in McDonalds around the world adjusted for

exchange rates

Average Priceof a Big Mac in

China

Average Priceof a Big Mac in

USA

This implies that theChinese Yuan is

undervalued by a little

over 40% based onpurchasing power parity.


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Relationship Between US and

Chinas Economy

d d i i l


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Trade and Financial

Dependence between the Two

Economies

The U.S. is one of Chinas major export

markets. The Chinese exports to the U.S. rose from

$100 billion in 2000 to $296 billion in 2009,while imports rose from $16 billion to $70

billion. The Rising volumes of trade between the two

economies have made them more importantas mutual trading partners


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As you we can see from figure 1 from 1998 to 2006 exports to the U.S. accounted for a relatively stable

share of about 21 percent of Chinas overall export

Starting from 2007 to 2009, the share of Chinas exports going to theU.S. fell to about 18 percent and The share of U.S. exports going to

China has risen gradually over the years but is still under 5 percent. Moving to the second graph which is about U.S imports Vs chins

imports we can say that

As a source of U.S. imports, Chinas share has increasedsteadily, to 15 percent of total U.S. imports by 2009.

Chinas dependence on U.S. imports, by contrast, has fallenover time, with imports from the U.S. accounting for about7 percent of Chinas imports since the mid-2000s.


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From the graphs we can clearly deduce that china isgaining a lot from this business relationshipcompared to U.s

If we want to predict the the nature of this relationship overthe next few decades based on trends between 1978 and2006, expectations would be quite positive.

However, it appears to be no longer the case


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In 2009, as the United States was crawling out ofrecession. at very low rates of growth, experiencinghigh unemployment, heavily indebted, and strickenby uncertainty about the future.

Opinion leaders observed Chinas continued near-double digit annual economic growth rates.

This was a turning point where the U.s leaders startedasking where did we go wrong ??? And what china getright ?

The answers that most resonated were that the

United States had been too permissive of Chinas riseand that it was time for a tougher policy tack, andthat the secrets of Chinas success were five-year plansand other elements of state-directed capitalism


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The United States was portrayed as losing at

trade and it was losing because Chinaperpetually cheats.

Currency manipulation, subsidization ofindustry, dumping, intellectual property theft,discrimination against imports, forcedtechnology transfer, indigenous innovationpolicies, raw material export restrictions, and

other allegations of cheating came to defineChinese trade practices.

Some of the reactions that Obamaadministrtions were that


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By 2011, the Obama administration was advisingU.S. telecom carriers that if they had aspirationsto partake on the lucrative U.S. government

procurement market, theyshould not purchaserouters or other equipment from Chinesecompanies, Huawei and ZTE, citing them as cybersecurity threats to the United States.

In 2012, the House Intelligence Committeeproduced a report reaching similar findings andadvising all U.S. companies against doingbusiness with those companies.

the administration reported progress towardcompletion of a trade agreement between theUnited States and 10 other Asia-Pacific nations,

which conspicuously excludes China.


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The Effect of Chinas Devaluated

Currency on US Economy


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US Economy Right Now

In 2013 the economy grew 2.4%, instead of theAdvance Estimate of 2.5%, from January throughMarch this year. This is still an ideal growth rate,which is anywhere between two to three percent.

The US three major sources of economic growth thisyear are: First and foremost, housing construction is

solidly expanding in response to rising housingprices and demand, which is something we have notseen in 7 years. Second, consumer spending is stillshowing confidence. Third is manufacturing,

especially from agri-business that added inventory.


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In 2012 the U.S trade deficit with China wasabout $315 billion. An increment of $20 billion

from the year before. The trade deficit exists despite the fact that

U.S exports to china were the highest inhistory. In 2012 the US exported $110 billion in

goods.

However imports from china to the US alsoset record of $426 billion.


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Why there is a U.S trade deficit

with china?China is able to produce good at a lower costbecause:

Lower standard of living, which allowscompanies to pay lower wages to workers.

They set the exchange rate lower so that it isalways priced lower than the dollar.


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How it affects the US?

American companies cannot compete withChinese companies so as a result jobs are lost.

The US competitiveness in the global marketdeclines.

China may gain political leverage over U.S fiscalpolicy, since it could call in its loan.


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What is being done by the U.S?

In 2009 the US treasury started a dialogue with Chinawhich pressured them to loosen its peg against thedollar and rose the price of Chinese exports, loweringthe trade deficit.

For example: Elimination of a 17% tax rebate for exporters.An increase in central bank interest rates, increasing

the value of the Yuan.An increase in the reserve requirement for central

banks to 12%.A $3 billion investment in the U.S. Blackstone Group


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China the biggest banker of the US

China is the largest foreign holder of U.S. Treasury bills,bonds and notes. As of January 2013, China owned $1.264trillion Treasuries. This is 11% of the total $11.6 trillionof debt held by the public.

China buys U.S. debt to support the value of the dollar.China pegs its currency (the Yuan) lower than the U.S.dollar to keep its export prices competitive

China's role as America's largest banker gives it leverage.For example, China threatens to sell part of its holdingswhenever the U.S. pressures it to raise the Yuan's value.China counters by saying they did raise the Yuan's valueby 20% between 2005-2010.


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US exports

In the last 12 months, U.S. exports have grown 23%,outpacing China's export growth rate of 17%.

U.S. export growth is finally beginning to put a dent in theU.S. trade deficit with China. In the first six months of this

year, U.S. exports to China were 20% higher than the sametime period last year, while imports from China were onlyup 4%. If this U.S. export to China continues to increase, it

would reverse a 10-year trend.

This is happening as a result of the declining dollar,, which

makes exports cheaper when compared to foreign goodsand services. However, a more important shift has been theinactivity of U.S. consumer demand for imports combined

with a 10% growth in Chinese consumer demand.


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How Chinese Exchange Rate Directly

Affects You The weak Yuan/strong US dollar combination makes Made in

China products on American shelves less expensive. If theChinese government allows the Yuan to increase by 10%, that

will mean a direct increase in the costs of everyday products.

This would be an unacceptably high burden for millions of lowand middle-class Americans, as well as millions of Americancompanies who buy cheap Chinese imports.

Because of the trade imbalance, the Chinese buy U.S. TreasuryBills with their excess dollars. This huge purchasing activitykeeps the demand for Treasury Bills high, which keeps theprice high, which keeps interest rates low. Thus interest ratesare perhaps lower than they would otherwise be without theChinese purchases. For borrowers, this is good; for lenders, not

so good.


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Conclusion


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China is under valuating its currency by

investing in U.S currency.

U.S knows that Chinas economy is doing welland this is a long-term threat.

U.S companies really need Chinas businessbecause of their low wages. US companiesmake money out of Chinas low prices.

U.S and China are economically connectedbecause they both benefit from each other.


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References Amadeo, K. (n.d.). Retrieved from

http://useconomy.about.com/od/tradepolicy/p/us-

china-trade.htm

Neil Irwin (n.d) Retrieve from

http://www.washingtonpost.com/blogs/wonkblog/wp/

2013/04/26/the-incredible-stagnant-u-s-economy/

NELSON D. SCHWARTZ (n.d) Retrieve fromhttp://www.nytimes.com/2013/05/04/business/econom

y/us-adds-165000-jobs-in-april.html?pagewanted=all


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References http://www.brookings.edu/research/testimony/2010/02/25

-us-china-debt-prasad

http://www.forbes.com/sites/danikenson/2013/01/29/reading-the-tea-leaves-on-u-s-china-economic-relations/

http://www.bbc.co.uk/news/business-20177210

http://www.bankrate.com/finance/economics/chinas-economy-influences-us-1.aspx
http://www.bankrate.com/finance/economics/chinas-economy-influences-us-1.aspxhttp://www.bankrate.com/finance/economics/chinas-economy-influences-us-1.aspx


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References

http://www.nasdaq.com/article/what-does-chinas-currency-manipulation-mean-for-the-dollar-cm182405

http://money.cnn.com/2010/11/10/news/economy/what_is_

currency_manipulation/index.htm http://www.davemanuel.com/investor-

dictionary/currency-devaluation/

http://www.investopedia.com/terms/e/exchangerate.asp

http://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp

http://en.wikipedia.org/wiki/Currency_war

Exchange Rate China USA

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