Chinese Yuan/Dollar Exchange Rate: A Historical Review and Future Perspective

Chinese Yuan/Dollar Exchange Rate:

A Historical Review and Future Perspective

Yong Cao, Ph.D.Rashmi Prasad, Ph.D.

University of Alaska Anchorage

World Trade Center AlaskaNovember 02, 2011

China Yuan/Dollar Exchange RateWhy it is important:• Influence China’s purchasing power

– The customers in China will have higher purchasing power with Yuan appreciation

• Influence American consumer’s social welfare – Consumer good in major us retailers will be more expensive

with Yuan appreciation• Influence the global financial markets

– Speculation of Yuan appreciation will cause in-flow of large amount of foreign currency

• Currency Exchange Rate Oversight Reform Act-October 03 2011– Controversial – Positive vs. negative for different actors

Yuan vs. Dollar: A Historic Review

Period 1: Before 2002

Fixed rate pegged to dollar with 8.277RMB/dollar without U.S. engagement

•Annual debate in the U.S. Congress over renewing “most favored nation” status to the PRC before China became WTO member on December 11, 2001

Period 2: 2002-October 2003RMB pegged to dollar with 8.277 RMB/dollar with increasing pressure from United States

•Senator Schumer introduced the first Congressional bill targeting RMB value in 2003•Talks between high-level officials (including the president) to prioritize a flexible RMB policy•Mobilize supports from other countries on RMB flexibility

Period 3: October 2003-July 2005

RMB pegged to dollar with 8.277 RMB/dollar with increasing pressure from the United States, and China started to change its fixed system to a float system

•Joint committee between U.S. and China to change RMB from fixed system to float rate system•More legislators involved, backed by Union and other NGOs, congressman Bernie Sanders and others moved to withdraw normal trade relations treatment on 9 February 2005•U.S. hedge funds started to enter China’s market on a large scale

Period 4: July 2005-July 2008On 21 July 2005, the RMB peg was lifted; RMB started to appreciate from 8.277 to 6.83 RMB/dollar

•In 2006, two U.S. senators co-sponsored a bill to impose high tariffs on Chinese products if the country did not let the Yuan rise•The Fair Currency Alliance hired a Washington law firm to prepare a Section 301 petition•More U.S. hedge funds involved in China’s market

Period 5: August 2008-December 2009Float rate within the narrow band of 6.81-6.838 without pressure from the United States

•The U.S. focus shifted to receive support from China to resolve its domestic financial crisis•China became the 2nd largest holder of U.S. treasury bonds in 2008•The RMB issues were put aside for the time being

Period 6: December 2009-July 2010Float rate within a narrow band of 6.828-6.838 with more pressure from the United States

•Increasing pressure from U.S. for China to have more flexible exchange rate system•Threat to label China as a currency manipulator

Period 7: July 2010-PresentRMB started to appreciate from 6.82-6.45 RMB

•Increasing pressure from U.S.•U.S. military exercise in the Yellow Sea •China adopted a more flexible system•More U.S. hedge funds involved in the Chinese market

The Negotiation Strategies and Interactions between China and the United States

Will stronger Yuan reduce the U.S. trade deficit?

[T]here is little evidence that a stronger yuan would reduce the U.S. trade deficit with China or improve the jobs picture.-----by James A. Dorn, Forbes.com on October 4, 2011.

Major US manufacturers and retailers do not support Currency Exchange Rate Oversight Reform Act

• Boeing • Apple• Wal-mart

Will stronger Yuan force global firms to move manufacturing function back to US?

The major reason behind the global manufacturing firms to stay away from US

• The legal environment• The legal cost• The government’s different attitude

towards business operations

Eugene Smith Grant Photography for Humanistic Award Winner-- Lu Guang

Jiangsu-Taixin

Henan-Anyang

Zhejiang--Xiaoshan

Guangdong-Shantou

Jiangsu--Changshu

Hebei-Shexian-Tianjin

Who will be the winner in this game?

• US-based hedging funds• US-based exporters• Upper class in China

– 15% already immigrated to overseas– 40% more are doing now

• Investors who are the early entrants in China’s market—particularly before 2008

• Labor-Union?

Who will be the loser in this game? • Global-Capital Intensive Manufacturers.

– (e.g. Gen Electric) • Global-Labor-Intensive manufacturers.

– relocate to Vietnam, Mexico. Central America, and Bangladesh

• Local Manufacturers• Importers who import goods from China• US consumers

Future perspective• Election syndrome• RMB’s globalization

Q&A

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