Blog 4: China says “No” to the appreciation on its currency

When we talking about currency and exchange rate, the first thing come into my mind is the cost of doing foreign-exchange business. As whenever a company import, export or even merge with a foreign business, they should consider the currency risks, thus minimize those risks.

    
China always reluctant to put its currency policies under the spotlight, especially in the international financial forum. After G-20, China becomes isolated by other companies like US and France, as Chinese government resist appreciating its currency (Wall Street Journal). What was worse, they even push great pressure to China, as one of the central bank in G-20 said that “negotiators can’t stay here forever and waiting for Chinese agreement”. French officials convinced China that Yuan appreciation can help contain inflation, in that it would makes imports much cheaper in dollar terms. However, appreciation in Yuan can make Chinese companies lose lots of profits. Let’s imagine that if one American tourist transfers his one million dollars into Yuan in 2005, which means that he can gain 8.5 million Yuan. After he spend 2 million in China for travel in last five years, he still can transfer his 6.5 million Yuan into one million dollars in 2010, this implies that he don’t even need to spend one dollar for this five years’ travelling because of the appreciation in Yuan. After considered the potential loss for companies, Chinese government resist to adopting exchange-rate appreciation.


People could be forgiven for thinking that appreciation on Yuan can boost China’s import business. Indeed, it can help importers improve its products volumes as the costs are much cheaper than before. However, on no account can we ignore the influence on the export business. A typical example is the benefits gained by UK companies from sterling’s weakness. As Financial Times reported in Thursday that Conductix-Wampfler which is a UK manufacturing company, taking advantages of the weak pound not only to improving sales volumes but also to increasing its profits margins. In terms of China, which is the world’s biggest debtor of America, owns almost two trillion dollars in 2009. From my perspective, if China has appreciated its currency, which means US dollar get much weaker against Yuan, this will result in amounts of hundred billion lost for China.  


In order to stimulate exports and balance the slightly appreciation on Yuan, China began to reduce or even eliminate some tax rates in exported products, which is called export Rebates policy. In my opinion, even though the cost on those exported products has reduced because of the reduction on tax rate, the biggest beneficiary is not China; it is still those countries that hold stronger currencies. As we all know that tax is one of the main financial resources to support governments, hence, the reduction on tax rate can be a great reverse problem to Chinese government, like the potential influence on constructing infrastructure to the public. Moreover, the reason why I believed countries like US can gain benefits from this export rebates policy lies with their steady currency. As those people are the final consumption group, who still can use the same amount of money to buy the same products. It seems that reduction on tax rates has noting to do with their money as they don’t have to spend extra to buy products, isn’t it?