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Chinese Yuan/Dollar Exchange Rate: A Historical Review and Future Perspective Yong Cao, Ph.D. Rashmi Prasad, Ph.D. University of Alaska Anchorage World.

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Presentation on theme: "Chinese Yuan/Dollar Exchange Rate: A Historical Review and Future Perspective Yong Cao, Ph.D. Rashmi Prasad, Ph.D. University of Alaska Anchorage World."— Presentation transcript:

1 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 Alaska November 02, 2011

2 China Yuan/Dollar Exchange Rate Why 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 –Controversial –Positive vs. negative for different actors

3 Yuan vs. Dollar: A Historic Review

4 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

5 Period 2: 2002-October 2003 RMB pegged to dollar with 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

6 Period 3: October 2003-July 2005 RMB pegged to dollar with 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

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

8 Period 5: August 2008-December 2009 Float rate within the narrow band of 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 2 nd largest holder of U.S. treasury bonds in 2008 The RMB issues were put aside for the time being

9 Period 6: December 2009-July 2010 Float rate within a narrow band of 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

10 Period 7: July 2010-Present RMB started to appreciate from 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

11 The Negotiation Strategies and Interactions between China and the United States

12 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.Forbes.com

13 Major US manufacturers and retailers do not support Currency Exchange Rate Oversight Reform Act Boeing Apple Wal-mart

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

15 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

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

17 Jiangsu-Taixin

18 Henan-Anyang

19 Zhejiang--Xiaoshan

20 Guangdong-Shantou

21 Jiangsu--Changshu

22 Hebei-Shexian-Tianjin

23 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?

24 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

25 Future perspective Election syndrome RMB’s globalization

26 Q&A ?


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