Ethical Dilemma: “A weak Dollar Versus A strong Yuan” Case Study
The importance of Yuan relative to the dollar
The relationship between the two currencies is critical in evaluating the balance of trade in both countries (Williams and Donnelly 96). In fact, weak Yuan in relation to the dollar has advantages and disadvantages. The argument being advanced by economic pundits is that China has increased benefits from devalued currency.
However, the benefits accrue to both economies. From the China’s perspective, weaker value of Yuan relative to the dollar encourages foreign direct investment, increases wages and encourages employment (Williams and Donnelly 96). In addition, the devalued currency will also keep the deflationary pressures at an average rate. Further, appreciating Yuan will result in decreased Chinese exports, which by extension depletes the supply of dollars that would have been used for foreign direct investments.
China views the way its currency is pegged against the dollar as a means through which its economic stability is kept (Bernanke 55). The undervalued Yuan also have some benefits to the US or any other country that trade with China. As indicated, the US consumers can access products at lower prices.
Moreover, US producers using Chinese goods as raw materials can access the inputs at low-costs. In addition, the cheaper Yuan in relation to the dollar ensures decreased inflationary pressure in the US economy (Bernanke 56). On the other hand, the undervalued Yuan will be beneficial to the Chinese industries competing with US expensive products. The result is the reduced production in the US, which by extension leads to decreased rate of employment (Bernanke 56).
In terms of balance of trade, the undervalued Yuan will make US products exported to China to be expensive thereby decreasing the volumes of products being sold to China. Conversely, low Yuan reduces the prices of the Chinese products being sold into the US economy thereby encouraging the imports (Eichengreen 101).
As Chinese government continues to peg its currency below the required levels, the balance of trade between the two countries continues to widen. On the other hand, the US economy continues to suffer while Chinese firms and industries benefits from the economic situation.
Moreover, the continuous increasing value of Yuan against the US dollar is a clear indication of the strength of Chinese economy. Most of the speculators and investors in the world major stock exchange markets forecast growth in the Chinese economy enabling the Chinese currency to increase its value (Bernanke 56).
In fact the value of Yuan have enabled China grow its exports and manufacturing that in effect have contributed to the general growth of its economy. Moreover, the weaker Yuan has increased the demand for Chinese goods domestically and internationally. The increased demands have boosted the production with effect on reasonable portion in economic expansion.
Weak Yuan has also encouraged consumer spending on Chinese products both at the domestic and international levels. In other words, weaker Yuan have encouraged the purchasing power of Chinese consumers within the country and abroad. Most of the consumers can access the Chinese products at affordable prices. In fact, low prices have boosted the consumer confidence on the Chinese products.
Moreover, weak Yuan have also encouraged exchanges among the international corporations operating in China (Williams and Donnelly 96). International corporations such as Wal-Mart can easily produce at low-cost and sell their products at cheaper prices into the international market. The low-cost production in China exacerbated by weak Yuan against the dollar is a competitive advantage to firms operating in China (Bernanke 56).
Therefore, it is critical for the currencies to be pegged at a particular value that is deemed beneficial to both economies. Like any other commodity, the demand for currencies decrease or increase depending on the situations in the market (Eichengreen 102). The supply of the currency should also be kept in response to the demand in the market.
In other words, the Chinese central bank will maintain a particular amount of Yuan to keep the balance needed in the market. In most cases, countries trade in their currency to maintain the exchange rate as well as determine the amount to be accumulated through the balance of trade (Eichengreen 103).
Appreciating Yuan against the dollar would result in less accumulation of Chinese foreign reserve in terms of dollars. In effect, the Chinese economy will be destabilized because of decreased trade with US as well as the rest of the world. In essence, the Yuan rates against the dollar must be pegged at an agreeable rate that would foster the abundance of trade existing between the two countries (Eichengreen 101).
The report on China’s currency manipulation
Over the years, China has been accused of manipulating its currency thereby creating imbalances in international trade. Many countries particularly US believed that China’s economic growth has been exacerbated by its ability to manipulate its currency. In this regard, currency manipulation means devaluing the currency in order to give China trade advantage (Bernanke 58). In other words, low values of Yuan create a balance of trade in favor of China.
The effects of devaluing a currency are on both sides. As indicated, low values of Yuan encourage the China’s exports while result in the reduction of the US exports. Industries and firms producing competing products with firms from China are disadvantaged since they produce at higher cost (Bernanke 58).
On the other hand, Chinese firms located in US will produce at low-cost since they utilize cheap imported raw materials from China. Specifically, compared to the US firms, the Chinese firms have greater competitive advantage due to the devaluation of Yuan.
However, US firms operating in China have greater advantages. The firms operating in China are capable of producing at low-cost thereby increasing their competitive advantage (Bernanke 58). US firms like Wal-Mart that would have been rendered un-operational due to high costs of business processes in the US have the opportunity to produce and export due to the cost advantages. Moreover, US citizens are capable of accessing several products at low-cost due to cheap imports from China.
Despite the fact that devaluating Yuan have negative influences on the US economy, appropriate policies should be put in place to enable the balance of trade between the two countries. In fact, Chinese government should be encouraged to peg the value of its currency at an agreeable exchange rate that will not affect both sides of the economy. In addition, the Chinese currency exchange rate has been appreciating over the years thereby enhancing the US balance of trade.
Moreover, appropriate trade and monetary policies that cushions US firms against foreign currency devaluation should be adopted (Bernanke 58). China should also be encouraged to float its currency to allow market forces determine the value. The exchange rate that is determined by the market forces creates a balance in the currency value that encourages firms in both economies to have equal opportunities and cost advantages (Eichengreen 101).
The current situation is that China is appreciating its currency against the world major currencies. The Yuan value against the dollar has been stabilized at a particular rate that has encouraged balanced trade between the two countries. China realized that devaluing its currency against the dollar not only affects its trade with the US but also with other countries round the globe (Bernanke 58).
The actions of Wal-Mart due to appreciating value of Yuan
Appreciating value of Yuan means that the cost of production in China will be increasing. In other words, the Yuan value is decreasing against the dollar. The appreciating value of Yuan enables goods and services produced out of China becomes more competitive (Williams and Donnelly 97).
The meaning is that firms operating in the US and China will have equal competitive advantages. As such, companies such as Wal-Mart should start looking for strategies that would enable low-cost operations. The firm should adopt cost-cutting strategies such as laying-off workers, closing down some of its plants as well as other financial prudent measures.
In addition, the company should also consider relocating to the other developing countries that have low valued currencies compared to that of US dollar. In these countries, the firm can still operate at low-cost and export its products to the US. Moreover, Wal-Mart will still enjoy the cost advantages it used to have in China. Besides, Wal-Mart can change its operational and production strategies.
The company can increase its share in the market through absorption of the competing firms. At the same time, the company can scale down its production to reduce the increasing costs resulting from the appreciating Yuan. The company should also consider relocating back to the US since the cost of production in China and in the US would be similar.
Whether exporters from Argentina, Indonesia, Malaysia, or South Korea should accept payment in Yuan
Accepting payment in Yuan will depend on its value against the dollar or its value against the country’s currency. Most of the countries’ currencies are pegged on the value of dollars. Moreover, countries will accept payment in currency that can be exchanged into dollar at a stable exchange rate (Williams and Donnelly 97).
The values of Yuan against these countries’ currencies are higher enabling exporters to have greater gains. In addition, the value of Yuan against the dollar has also been stabilized enabling other countries to gauge their currency against Yuan. In other words, the exporters from these countries cannot suffer huge losses arising from shocks within the foreign exchanges. Since these countries’ currencies are undervalued, accepting Yuan will boost their exports and by extension production of most firms.
As indicated, the values of these countries’ currencies pegged on Yuan are low. The existing balance of trade will be in favor of these countries enabling exporters to earn more from the commercial dealings with China.
Even though China’s main concern is to transform Yuan into leading world currency and increase its foreign reserves, exports from these countries will be increased due to augmented gains from such exchanges. In addition, the overvalued Yuan will be beneficial to these countries industries competing with China’s expensive products (Williams and Donnelly 97).
Bernanke, Ben. “International capital flows and the returns to safe assets in the United States 2003-2007.” Financial Stability Review, 15.3 (2011): 54-63. Print.
Eichengreen, Barry. “Global Imbalances: In a Saving and Investment Perspective.” World Economic Outlook, 16.1 (2005): 100-104. Print.
Williams, Brock and M. Donnelly. “U.S. International Trade: Trends and Forecasts.” Bureau of Economic Analysis, 34.6 (2010): 91-99. Print.
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The importance of Yuan relative to the dollar The relationship between the two currencies is critical in evaluating the balance of trade in both countries (Williams and Donnelly 96). In […]