Exporting Nike Footwear, Apparel, and Equipment to China - Essay Example

Your first and sur Your Due Foreign Exchange Risk Analysis Exporting Nike Footwear, Apparel and Equipment to China The application of the market principles to public sector organizations and operations resulted in the fascination with the markets in China resulted in quasi market forces on state activities and there is considered as pervasive and profound. In china the macro economic management involved the public service provision and social program delivery. The developments recorded by market economy forced even bloc countries and China to shift from plan to market economy. China gained high profile in the manner it developed the markets. This is due to flexibility in imports and exports and giving permissions for permissions. The policies in china resulted in a successful market economy and indigenous private sector. This resulted increase of foreign trade and inward investments. The high growth recorded in China regarding economic activity and manufacturing, prompted many companies to export to establish manufacturing units in China.1 The exchange rate in the international market is dominated by US dollar. The imbalance in the system can be considered as a reason for instability. The foreign exchange policy by any state should have a long term agenda to appreciate it along with the increasing exports, which is a difficult thing. As per now the USD is international currency and Euro and Yen are trying to replace it. For this purpose the currency should fulfill the classical money functions. This makes the countries like china to have US currency up to some extent and this leads to appreciation of that currency resulting in increasing the import costs. If any country wants to appreciate its currency, it must be accepted by lot of people and countries in the world. This increases demand for that particular currency and can be appreciated. 2 The reason for the change in the foreign economic relations and exchange of Yuan with other currencies is due to opening of its economy to the outer world. The private foreign capital was used to increase the economic development. As China absorbed the new capitals, the currency was being appreciated. The increase of manufacturing sector simultaneously provided the foreign exchange to china to import the requirements. As it followed the self reliance the imports are kept at a limitation and this resulted in appreciation of its currency over the international currencies. As a result 1USD can fetch only 7 Yuan and this is due to the acceptance of the Yuan by different countries like the members of ASEAN and other countries. The self reliance and control of imports also made Chinese currency appreciate gradually over USD in the course of time. As per Nike company is considered it can export its goods into china. One reason is that there are very less currencies like Yuan that are very close to the value of US. This makes the company to make more profit in China than the countries like India, which have 1USD = more than 40 Indian rupees. So, instead of exporting the products to the countries like in India, it is better to export to country like China for Nike. Though it results in decrease of foreign investment, this resulted in healthy competition and growth of economy. 3 From the hardened stand in 1949-50 the US policy has been liberalized from then on China. UK along with US favored China and both of them relied heavily on china. The policies of US and UK made china to implement the economic reforms. 4 After the end of China's Civil war both other parts of the world and China recognized the importance of China and the openness of the economies. After Europe, Britain considered the China to be important according to American influence. Out of its large investments in the world, the British and Americans have substantial investments in China. China, which was ranked below Hong Kong and Malays by US in the preferential treatment emerged as the front runner in the economic reforms and the importance of it in international economic arena. US and UK had to rely on exports to China as its currency Yuan has substantial value compared to the countries like India. The currency exchange rate with Yuan encouraged the exports of US, UK to China and the increase of domestic demand resulted in flow of investment from these countries into it. This resulted in further appreciation of its currency and this resulted in much more integration and trade share of China in the international market. The potentially larger market of China was demonstrated by US and UK investments to the world. These investments are greater than any other western power and the market of China is important for a company like Nike to export its goods to China or to invest in it. As the US and UK assisted for economic reforms in China to have a pro western government in that country the policies framed by US, UK and China resulted in favor of western MNCs and the development of economy of China. The economic policies and the domestic demand in China are in line with the economic reforms and the capacity of investments of MNCs. 5 The European rate mechanism resulted in debates about fixed and floating exchange rates. The fluctuations in international exchange rates on domestic prices results in importance of floating rates. As there is instability in exchange rate it results in inflation. In china as there is appreciation in currency rate against international currencies, there is stability and even appreciation of the currency of China resulting in attraction of foreign investment. The national price levels and exchange rates are stable in China and this results in safety of the investment of the MNCs belonging to US, UK and western countries. This relies on the expectations regarding exchange rates and the effects of real exchange rate changes and trade flows. The empirical data on the currency stability of the Chinese Yuan is a result of the econometric and modeling techniques to a wide range of up to date on the G-7 and OECD countries. The purchasing power parity can be considered as a measurement of variations in the structure of relative prices. The model to link the patterns of world trade to variations in relative prices. 6 The production economics can be used as analytical framework. The data envelopment analysis will help in developing alternatives to econometric models that concentrate on the performance of the economy. The standard fare consists of basic input and output regarding the exchange rates and currencies. The data envelopment analysis results in directional distance function and free disposal analysis. This results in non radial measures of efficiency and multiplier bounds. The mergers and breakups of the firm in the country considered for the market and for exporting can be a indicator for the investment and exporting. As the record of the China suggests that there are no mergers and acquisitions, or they existed in least number the economy can be considered as stable and growing. The break up of firms due to the administrative purposes as the business increased also can be an indicator for the healthier economy. As there are enough instances of the above situations mentioned above, the companies like can target the economies like China for exports or for investment. The company has to measure the efficiency of the market using the market prices. This can be used as a critical link between DEA and neoclassical theory of a competitive firm. 7 Speculation about changes in the Chinese exchange rate policy has become a significant driving force for day-to-day movements in the dollar-euro exchange rate. There is some uncertainty about what would happen if China ceases or reduces its interventions to support the dollar against the renminbi and there are fears that the euro might move up sharply against the dollar if the Chinese increasingly intervene in favour of the euro rather than the dollar. However, assessing the complicated triangular relationship between the renminbi, the dollar and the euro, the Economist Intelligence Unit believes that this factor has the potential for only moderate effects on the currency relationship between the US and the euro area. Shifts in the euro-US interest rate differential and concerns about US external imbalances will continue to be much more important.8 At present, the Economist Intelligence Unit forecasts that China will allow for only a moderate strengthening of the renminbi against the dollar over the next two years, which would bring the renminbi to Rmb7.54:US$1 by the end of 2007 and Rmb7.43:US$1 at the end of 2008, from Rmb7.81:US$1 at the end of last year. This would not entail a major trend shift in the renminbi's relation to either the dollar or the euro. Taking into account substantial increases in Chinese unit labour costs, China would continue to lose competitiveness against both the US and the euro area (the latter with greater fluctuations) but not at a pace fast enough to reduce Chinese real export growth rates to single-digit figures.9 But the possibility of more drastic changes remains. Macroeconomic concerns about the impact of reserve accumulation on the domestic economy may convince the Chinese authorities to reduce or end interventions and to let the renminbi appreciate more strongly. The People's Bank of China is struggling to mop up the domestic currency issues in the context of its purchases of foreign government bonds. Consequently, the forex interventions contribute to strong growth in domestic liquidity and therefore fuel the boom in gross fixed investment, raising risks of over-heating. In addition, the US will continue to step up the pressure for China to accelerate the revaluation of the renminbi. In mid-December, the US treasury secretary, Hank Paulson, and the chairman of the US Federal Reserve, Ben Bernanke, put pressure on China to accelerate the revaluation of the renminbi against the US dollar during high-level talks in Beijing. And in a speech in Bejing on December 15th, Mr Bernanke explicitly called the current weakness of the renminbi an "effective distortion" (he shied away from calling it "an effective subsidy", as the draft of his speech published on the Federal Reserve said; an effective subsidy could entitle the US to counter-measures under WTO rules). The victory of the Democrats in the US general election on November 7th last year will also lead to greater pressure on China, and China may be willing to accelerate the renminbi's revaluation in order to preempt more painful anti-China protectionist legislation.10 What would be the implications for the euro Firstly, Chinese forex interventions to support the dollar against the renminbi effectively increase the supply of the Chinese currency, depressing its exchange rate against all other currencies. An end to this policy would have the reverse effect. Secondly, the Chinese purchases of US treasury bonds also increase the demand for dollars, boosting the price of the dollar relative to all other currencies. If China ceases to strengthen the dollar, the US currency will weaken against all other currencies including the euro.11 This means that in theory, an end (or reduction) of Chinese forex interventions in favour of the dollar could have a neutral effect on the euro's effective exchange rate (the trade weighted exchange rate against a basket of major currencies). The impact from the weakening of the euro against the renminbi could be offset by the impact of the strengthening against the dollar. In practice, however, the euro's competitiveness would weaken, because of a third effect related to asset substitution. If China buys US treasuries, this increases the price of US treasuries. But private investors will react to this shift in relative prices. Given that euro area and US bonds are close substitutes, some private investors will sell their US treasuries and instead buy euro area government bonds (they will obviously not buy Chinese government bonds because US and Chinese bonds are not close substitutes, not least because of capital account restrictions). 12 Over a period of several months, this effect via asset substitution will be very strong. This also means that if the Chinese cease to buy dollars and stop intervening, the euro will weaken against the renminbi by almost as much as the dollar, and will strengthen against the dollar only marginally. This assumes that the change in Chinese policy comes gradually. Liquidity issues and a possible market over-reaction might lead to a short-lived more substantial strengthening. This would particularly be the case if the policy adjustment is relatively sudden, but given the preference of Chinese policy makers for gradual change this seems unlikely.13 A reduction of Chinese support for the dollar is not the only way that Chinese forex policy could affect the euro-dollar exchange rate. The People's Bank of China last year announced its intention to diversify its reserve holdings and any statements in this direction have tended to have substantial negative short-term effects on the dollar against the euro. If, implausibly, China started dumping its dollar holdings on foreign exchange markets and purchased euros, this would clearly have massive implications for the euro-dollar exchange rate even over the medium term of several months as the amounts involved would be so big that they could not be easily absorbed by the markets (Chinese overall foreign currency reserves probably hit the US$1trn bar in October 2006). But this is an unrealistic scenario, as China would itself be severely hurt by asset losses on its remaining US dollar holdings and would also cause major international uproar.14 If, more plausibly, China only shifts its reserve accumulation (rather than its stock of reserves) away from dollars to euros (ie if it buys a smaller share of dollars and a larger share of euros), the asset substitution effect will again come into play and limit the effect on the dollar-euro bilateral exchange rate. Chinese purchases of euros would strengthen the euro, but private investors would then sell euros for dollars so that the overall impact on the euro-dollar rate would be contained. The overall conclusion is that beyond very short-time horizons of just a few days, for all plausible scenarios changes in the Chinese foreign exchange policy will have only limited effects on the bilateral dollar-euro rate.15 References 1. Wong, Linda(Editor). Market in Chinese Social Policy. Gordonsville, VA, USA: Palgrave Macmillan, 2001. p 1. http://site.ebrary.com/lib/nulibraries/Docid=10057377&ppg=14 2. Pearson, Margaret M. Joint Ventures in the People's Republic of China : The Control of Foreign Direct Investment under Socialism. Ewing, NJ, USA: Princeton University Press, 1992. p 3. http://site.ebrary.com/lib/nulibraries/Docid=10031938&ppg=12 3. Kaufman, Victor S. Confronting Communism : U. S. and British Policies toward China. Columbia, MO, USA: University of Missouri Press, 2001. p 2. http://site.ebrary.com/lib/nulibraries/Docid=10048197&ppg=20 4. Ray, Subhash C. Data Envelopment Analysis : Theory and Techniques for Economics and Operations Research. West Nyack, NY, USA: Cambridge University Press, 2004. p i. Read More