exchange rate china usa
TRANSCRIPT
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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