Assessing the Likelihood of RMB Devaluation

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Assessing the Likelihood of RMB Devaluation

• Hung-Gay Fung
• University of Missouri-St. Louis

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External Factors

• Asia
• maintain export as element of business model.
• vs. U.S., Japan, Europe.
• Europe
• Euro provides opportunity for domestic growth
• uncertain opportunities for exports.
• U.S.
• slow domestic growth, other than technology,
• little domestic opportunities.
• looking external for opportunities.

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China - A Key Global Force

• Most important among Asian countries
• market of 1.2 billion people
• have not been subjected to the currency crisis
  and is subjected to pressure
• Economic growth -
• revised GNP growth for China 7
• GNP growth for world 2
• even at half the growth rates ???
• vs. Devaluation RISK

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Market Potential...
Source Worldbank, 1997
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The Impact of Crisis on China

• More imports from other Asian countries
• Korea steel (32.4), petro-chemicals (11.8),
  and textiles (9).
• Chinas exports slow down.
• Increase unemployment.
• Slowed FDI

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Economic Impact on Chinese Exporters

• Export goods more expensive in comparison to
  Asian countries.
• Lack of liquidity in Asia - lower demand.
• Erosion of competitiveness
• Super-competition from Asian countries,
  especially Korea and Japan

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China Under Pressure

• Under pressure to devalue its currency.
• Risk of a Chinese RMB devaluation?

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Why RMB may not depreciate

• Limited effectiveness in stimulating export (cost
  of RM imports, J-curve)
• Adverse impact on Long-term growth
• Negative impact on Asian crisis, hurts its
  credibility as an Asian Leader
• Foreign debt
• Other policies options available

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Chinas Strategies to Stabilize Currency

• Stimulate domestic economy.
• National Income C I G.
• Support exports with tools other than
  depreciation.

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Chinas Strategies to Stimulate Domestic Economy

• Revive shelved public projects, especially
  infrastructure projects
• Build privately owned housing projects

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Chinas Strategies to Enhance Exports

• Ease Export Credits by encouraging banks to make
  loans to export-oriented companies.
• Relax Export Licenses
• Ministry of Foreign Trade and Economic
  Cooperation issues more export licenses for base
  metals.
• Increase Tax Rebates
• Exporters will receive full 17 value-added tax.

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Regional Rebalancing

• An opportunity to ease regional growth gap
  (Coastal area vs. NW).
• A long-term solution to national unemployment
  problem.

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China A country visited by many...

• Stable political environment
• Close to US 7 billion FDI in 1996
• Visitors from all over the world
• 1.2 billion domestic tourists (High income growth)

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Business Strategies

• Enhance product lines/marketing (e.g.,
  conferences).
• Enhance productivity.
• Risks.
• Further devaluation, especially China
• Inaction

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Competition

• From other Asian Countries (especially after
  devaluation)
• Needs to have quality employee to compete...

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Corporate Business Strategies - Products

• Very high end product
• Middle market
• alliance - world, corporate and consumer
• regional rebalancing

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Corporate Business Strategies - Production

• Production Costs
• Productivity
• modernized plants
• education of labor force