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Assessing the Likelihood of RMB Devaluation Hung-Gay Fung University of Missouri-St. Louis 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. 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 Market Potential... Population Real GDP Growth 1997 China 91-95 Per Capita GNP 96 95 1,226 12.0% 9.6% $ 620 South Korea 45 7.5% 7.1% $ 9,700 T hailand 59 8.5% 6.4% $ 2,740 Indonesia 209 7.8% 8.0% $ 235 U.S. 267 1.9% 2.5% $ 26,980 Source: Worldbank, 1997 The Impact of Crisis on China More imports from other Asian countries • Korea: steel (32.4%), petro-chemicals (11.8%), and textiles (9%). China’s exports slow down. Increase unemployment. Slowed FDI 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 China Under Pressure Under pressure to devalue its currency. Risk of a Chinese RMB devaluation…? 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 China’s Strategies to Stabilize Currency Stimulate domestic economy. • National Income = C + I + G. Support exports with tools other than depreciation. China’s Strategies to Stimulate Domestic Economy Revive shelved public projects, especially infrastructure projects Build privately owned housing projects China’s 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. Regional Rebalancing An opportunity to ease regional growth gap (Coastal area vs. NW). A long-term solution to national unemployment problem. 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) Business Strategies Enhance product lines/marketing (e.g., conferences). Enhance productivity. Risks. • Further devaluation, especially China • Inaction Competition: From other Asian Countries (especially after devaluation) Needs to have quality employee to compete... Corporate Business Strategies - Products Very high end product Middle market • alliance - world, corporate and consumer • regional rebalancing Corporate Business Strategies - Production Production Costs Productivity – modernized plants – education of labor force