International Financial Management: Movements of Chinese Yuan against US Dollars - Assignment Example

a) The above chat represents the US Dollar/Chinese Yuan exchange rate covering 5 years starting from March 2008 till February 28, At the beginning of this period, Yuan was quite weaker against US Dollar such that one US Dollar was priced at around CNY7.1. Since the price of US Dollar kept decreasing in terms of CNY and reached at around CNY6.82 in the last quarter of 2008. From the end of 2008 till mid 2010 Chinese Yuan remained steady at 6.82. From the third quarter of 2010, US Dollar started depreciating against Chinese Yuan on a frequent basis such that in the beginning of 2013, Chinese Yuan appreciated by some 8% in these 2.5 years. Currently Chinese Yuan is fluctuating around 6.3 per US Dollar showing a stronger Chinese Yuan as compared US Dollar. Overall, it can be concluded that Chinese Yuan became stronger against US Dollar in past 5 years as it became stronger by CNY0.8 approximately 11.26%. From last 2.5 years, Chinese Yuan has been constantly appreciating against US Dollars. b) The above chart represents USD/CNY for the 12-month period starting from March 1, 2012 and ending on February 28, 2013. Exchange rate was at CNY6.3 at the beginning of the period and it was at around CNY6.29 at the closure of 12-month period. Overall the Yuan remained quite stable throughout 12-month period and appreciated by only CNY0.01 which is approximately 0.15%. If the above graph is closely looked at, it can be noticed that in the first seven months, Chinese Yuan tended to remain weaker as compared to US Dollar such that several times it touched CNY 6.34. On July 27, 2012, Yuan was found to be the weakest in the whole year such that it climbed up to around CNY 6.39 which was the highest exchange rate in the whole year. Since then Yuan remained a bit flat around the level of CNY 6.34 till October 2012. After that there has been a considerable appreciation observed in Chinese Yuan such that it broke the psychological level of CNY6.3 in mid-October and tend to remain stronger against US Dollars. It sharply strengthened on December 1, 2012 such that it came to the level of CNY6.22 reaching at the lowest point in the year 2012. However it was a very temporary downfall of US Dollar against Yuan such that Yuan got weaker from the very next day it crossed the level of CNY6.3. The current year i.e. 2013 started with appreciation of Chinese Yuan against US Dollar such that it appreciated tremendously in daily movements on January 17, 2013 as it broke up the level of CNY 6.204 and reached to the bottom of CNY6.218. However, the Yuan recovered very soon and remained flat at the level of around 6.29 at the end of the period. On a concluding note, the average exchange rate remained at around CNY 6.295 in last 12-month period with the highest point of CNY6.393 in July and with the lowest of 6.204 in January 2013. c) There are three key factors behind such steady movements of Chinese Yuan against US Dollars 1) Slow economic growth of China 2) Consistent pressure on China from rest of the world to appreciate its currency and 3) Eurozone Debt Crisis. Slow economic growth of China China experienced a very slow growth in its economy in the starting of 2012 such that it had to meet the lowest fixed assets investments in the past ten years which was a very alarming sign from Chinese perspective (Hays, 2012). Foreign investment in China was also at its lowest since the recession of 2008. Retail and real estate sector of China also disappointed throughout the year. This uncertain and rather disappointing economic data from China’s economy presented significant worries especially in US authorities such that they in the initial seven months, US importers tended to remain a bit reluctant from importing Chinese product due to the fact that Chinese Yuan was getting weaker against US Dollars because of the slow and disappointing economic growth of China (Hurley, 2009). Consistent pressure on China from rest of the world to appreciate its currency United States along with its other European Allies are the major importers of Chinese Products. They are very much concerned with the weaker Chinese Yuan as it increases their cost of imports. In 2010, Mr. Obama, President of United States, claimed that China has been involved in manipulating its Yuan especially against US Dollars in order to keep its exports on a cheaper level. He also used a very harsh language and blamed Chinese officials to have conducted intervention in the currency market by injecting more money in the foreign exchange market to keep Chinese Yuan undervalued (Wang, 2013). However, these claims were strongly denied by Chinese government officials and rather they allowed more trading volumes of Chinese Yuan in foreign exchange market as a means towards free float of Yuan with other currencies. In May 2012, the dialogues started between United States and China on the value of Yuan. Obama remained quite successful in keeping the value of Yuan appreciated during his tenure, however, this appreciation growth rate got stagnant in 2012 due to which he had to officially start of the dialogues over the value of Yuan (The New York Times, 2012). Chinese government officials were also considering this situation carefully and believed the appreciation of Yuan can decrease their exports but it can also decrease the economic dependency of China which has been set on exports from the past three decades. So, Chinese officials remained a bit indifferent on whether appreciating or depreciating their currency which resulted in approximately same exchange rate in the past 12-month period. Eurozone Debt Crisis Eurozone debt crisis has affected Chinese economy massively as the European Union has been the second leading importer of Chinese goods. Due to fiscal problems with the Eurozone countries, these governments cut back their imports from all over the world which damaged Chinese exports. In the first half of the last year, when debt crisis was on its peak, Yuan appreciated significantly against Euro such that it resulted in decrease in exports to European countries (Evans-Pritchard, 2012). Since August last year, euro strengthened against Chinese Yuan which turned out to be the most recovering sign for China’s export industry as it helped Chinese Yuan to weaken sharply against Euro. Chinese government officials met with German officials in order to provide better economic strategies to come out of this Eurozone debt crisis. This crisis continued to create worries until August for China as Eurozone countries cut back their imports on a larger scale. However, with the better prospects arising from Eurozone, Chinese Yuan remained steady for past 6 months which shows that China’s exports are on their way towards greater stability. d) The major portion of Chinese economy is dependent upon the exports that it makes to other countries. United States is the biggest importer of Chinese goods followed by Eurozone. Among all the exports that China makes, garments covers the most substantial part. China produces not only its own raw material for garments but it also imports raw material from other countries like India, Bangladesh, Pakistan, Myanmar, Cambodia etc. From these countries, China has undergone Free Trade Agreement due to which Chinese importers do not have to pay the import duties when they import raw material from these countries. This causes in the cheaper cost of production which results in increase production for further exports to US and European markets (The Economist, 2013). Due to increased level of inflation in China, the material and labor prices increased substantially which caused the higher finished goods prices. When imports became expensive for US importers, they presented their reservations, as a result Chinese Yuan dipped down significantly against US Dollars. This situation could have been a better option for China that its currency was getting weaker which would have been resulted in higher exports. However, the prices of exports in US Dollar were quite expensive for US importers which negated the probable benefit that could have been exploited by China due to weaker Yuan. However, China faces the currency risk in the form of Yuan appreciating against US Dollar. If Chinese Yuan increases against US Dollar, this will simply make the exports expensive to Chinese exports. This would happen because the remittances received by them would be in US Dollars. When they would be converting those US Dollars into Chinese Yuan, only few Yuan would be obtained by the exporters due to strengthened Yuan. The weaker the Yuan, the cheaper will be the exports for exporters and increased money they would be earning in Yuan. On the other hand, the stronger the Yuan, the more expensive will be the exports and the lesser money they would be earning in terms of Yuan (The Economist, 2013). With the ever increasing pressure from United States towards China to appreciate its currency has also presented new currency risk to Chinese exporters. Chinese exporters deeply fear the risk of Yuan appreciation which would result in a major cut of Chinese exports. Other kind of currency risk which is faced by Chinese exporters is the action taken by their own country to appreciate the value of Yuan. The government can do this in order to reduce economic dependency of China from exports. Chinese government feels uncertainty from major cut back of exports. Such a cut back could massively damage China’s overall economy. As a proactive measure, Chinese government can take their own initiatives in order to reduce this dependency and Yuan appreciation can be the biggest contributing factor in achieving such goal. Chinese export companies can take some actions in order to reduce this currency risk by conducting the hedging practice. These companies can purchase Yuan denominated forward contracts and can set their exchange rate in advance. This can eliminate the currency fluctuation such that exchange rate would be locked in. However, the disadvantage of this action is that this is a binding agreement and the companies have to buy Yuan as per the specified price in the contract. Other way of hedging against currency risk is the use of options. Chinese exports companies can use options when exchange rate is not in favor of them. However, if Chinese Yuan is getting weaker than expected, then their option can be lapsed unexercised. However, the cost of purchasing the option is non-refundable whether the option is exercised or not. Another way to hedge the currency risk is the currency swap. Currency Swap can be useful in such a manner that Chinese exporters will not have to deal in US Dollars as they would be receiving their money directly in Yuan. But in order to carry out the currency swap, Chinese exporters would have to find the US exporters of the same level of magnitude to whom they can make this swap. Chinese exporters would then be collecting their remittances from the Chinese importers and so do US exporters and importers as they would be collecting and paying their sums in US Dollars. However, the biggest disadvantage of currency risk is that it is very hard to find out the exact exporter or importer of the same need. e) Chinese Yuan has been appreciating for last two years. However, at this point in time it is very unlikely that Chinese Yuan would increase by a huge percentage. The major trade agreements for the upcoming year have almost been completed and there are very rare chances of a high appreciation of depreciation in Chinese Yuan (Mallaby & Wethington, 2012). In China, there are two types of lobbies which play a significant role in the currency appreciation and depreciation. When both these forces start to compete with each other, the ultimate result arises in the form of currency stabilization. Therefore, it can be concluded that Chinese Yuan may not face significant fluctuations against US Dollar in the next coming years. However, a meager appreciation in Yuan can be expected due to the pressure exerted by US government officials. As far as the currency is concerned, Chinese Yuan may not be a very good currency to trade in the upcoming years as the currencies of developed countries are facing greater fluctuations (Peoples Daily Online, 2013). China is still a developing country despite of the fact that it is the second largest economy in the world almost nearly dependent upon its export activities. References Evans-Pritchard, A. (2012, August 30). China’s fears grow over eurozone crisis. Retrieved March 17, 2013, from The Telegraph: http://www.telegraph.co.uk/finance/financialcrisis/9510058/Chinas-fears-grow-over-eurozone-crisis.html Hays, J. (2012, August 1). THE YUAN AND CHINAS YUAN POLICY. Retrieved March 17, 2013, from Facts and Details: http://factsanddetails.com/china.php?itemid=1115&catid=9 Hurley, D. T. (2009). A VAR Analysis Of US-China Economic Linkages. International Business & Economics Research Journal, 69-80. Mallaby, S., & Wethington, O. (2012, February 1). The Future of the Yuan - China’s Struggle to Internationalize Its Currency. Retrieved March 17, 2013, from Foreign Affairs: http://www.foreignaffairs.com/articles/136778/sebastian-mallaby-and-olin-wethington/the-future-of-the-yuan Peoples Daily Online. (2013, January 09). Chinas yuan unlikely to appreciate sharply in 2013. Retrieved March 17, 2013, from Peoples Daily Online: http://english.peopledaily.com.cn/90778/8084876.html The Economist. (2013, February 9). Yuan for the money. Retrieved March 17, 2013, from The Economist: http://www.economist.com/news/leaders/21571442-rise-chinas-currency-will-change-way-world-does-business-yuan-money The New York Times. (2012, October 18). Renminbi (Yuan). Retrieved March 17, 2013, from The New York Times: http://topics.nytimes.com/top/reference/timestopics/subjects/c/currency/yuan/index.html Wang, W. (2013, March 8). China Yuan up on Strong Exports, PBOC Guidance. Retrieved March 17, 2013, from The Wall Street Journal: http://online.wsj.com/article/SB10001424127887323628804578347720745100706.html Read More