Note: Not mine, Found this on facebook so thought it was interesting.... Source.
WHY & HOW CHINA KEEPS YUAN LOW?
Very nice views were received. I request the viewers to please read the views of Abhishek Abhishek & Avinash Gulia. Since I have very little to add, edited version of views of Abhishek Abhishek are given below:
China is the world’s manufacturing hub. It is the world’s fastest growing economy, logging double digit growth rate for almost 30 years. China’s rapid economic expansion is largely dependent on exports. Exports alone contribute about 30% to the GDP. China’s major exports are: electromechanical products (57% of total exports) and labour-intensive products like clothing, textiles, footwear, furniture, plastic products, bags and toys (20%).
By Keeping the Yuan Undervalued China gains as follows:
• It ensures that Chinese imports are cheaper than indigenous manufacture for most countries. This has created great demand for Chinese goods.
• Low cost of production has attracted FDI & modern technology, which has helped fund infrastructure & job creation in China.
• Imports into China are not attractive. It has helped create a massive trade surplus.
• A large stock of US dollars provides economic security to China (US dollar is the most secure global currency).
How China Manages to Undervalue Yuan:
• Chinese exporters are mandated to pay a large amount of US dollars to the Central Bank of China, thus curbing the value of Yuan.
• China is the largest buyer of US treasury bills in the open market. This keeps the demand of US dollar relatively high and raises the US dollar price relative to its own currency.
• China also prints Yuan simultaneously and floats it in the domestic market effectively decreasing its value in relation to the US dollar.
• China maintains low domestic interest rates. A lower rate increases domestic spending. The low interest rates render foreign buying of Chinese bonds unattractive. If the interest rates get raised then Yuan could be bought by other countries in the same way that China is buying dollars!
Conclusion:
China’s strategy has been successful in making her a manufacturing hub. US is unable & not committed to counter this, primarily because the citizens benefit from buying cheap Chinese goods & keeps the value of dollar up & thus cost of imports low (US is a big importer). Despite the Chinese strategy, production costs in China will rise with time, due to saturation of labour & rise in wages. ‘Make in India’ thus has a good chance!
WHY & HOW CHINA KEEPS YUAN LOW?
Very nice views were received. I request the viewers to please read the views of Abhishek Abhishek & Avinash Gulia. Since I have very little to add, edited version of views of Abhishek Abhishek are given below:
China is the world’s manufacturing hub. It is the world’s fastest growing economy, logging double digit growth rate for almost 30 years. China’s rapid economic expansion is largely dependent on exports. Exports alone contribute about 30% to the GDP. China’s major exports are: electromechanical products (57% of total exports) and labour-intensive products like clothing, textiles, footwear, furniture, plastic products, bags and toys (20%).
By Keeping the Yuan Undervalued China gains as follows:
• It ensures that Chinese imports are cheaper than indigenous manufacture for most countries. This has created great demand for Chinese goods.
• Low cost of production has attracted FDI & modern technology, which has helped fund infrastructure & job creation in China.
• Imports into China are not attractive. It has helped create a massive trade surplus.
• A large stock of US dollars provides economic security to China (US dollar is the most secure global currency).
How China Manages to Undervalue Yuan:
• Chinese exporters are mandated to pay a large amount of US dollars to the Central Bank of China, thus curbing the value of Yuan.
• China is the largest buyer of US treasury bills in the open market. This keeps the demand of US dollar relatively high and raises the US dollar price relative to its own currency.
• China also prints Yuan simultaneously and floats it in the domestic market effectively decreasing its value in relation to the US dollar.
• China maintains low domestic interest rates. A lower rate increases domestic spending. The low interest rates render foreign buying of Chinese bonds unattractive. If the interest rates get raised then Yuan could be bought by other countries in the same way that China is buying dollars!
Conclusion:
China’s strategy has been successful in making her a manufacturing hub. US is unable & not committed to counter this, primarily because the citizens benefit from buying cheap Chinese goods & keeps the value of dollar up & thus cost of imports low (US is a big importer). Despite the Chinese strategy, production costs in China will rise with time, due to saturation of labour & rise in wages. ‘Make in India’ thus has a good chance!
