Revaluation of the yuan becomes a signal for the dollar exchange rate

The sharp and confident revaluation of the RMB and the dollar

In brief: Dollar exchange rate depends largely on the future revaluation of the yuan and the further actions of the Chinese government.

Who needs a weak yuan? What will the exchange rate between the dollar? Technology companies deftly move production around the world only to find the most favorable conditions for himself. Apparently, now they have to make the next leap forward in this direction. Bank of China on Saturday announced that he intends to continue the reform of exchange rate policy and increase the flexibility of RMB exchange rate. In a statement posted on the bank’s Web site states that the established boundaries of fluctuations yuan (0,5% per day) remain unchanged. At the same time the Central Bank intends “to focus on the reflection of market demand, taking into account a basket of currencies”.

The decision of the Chinese central bank announced a week before the summit of G20, to be held in Toronto, Canada June 26-27. Strengthening China’s currency may appease critics of China’s currency policy in the U.S. and Europe. According to the representatives of the People’s Bank of China, now the most favorable conditions to make the yuan more flexible since both domestic and global economy on the path of recovery. But only a few weeks ago the Prime Minister warned that China should avoid too rapid creation and excessive appreciation of the broad economic incentives. Market participants viewed the statement of the Chinese Central Bank, which does not provide clear guidance on specific changes planned by the Bank as evidence that Beijing refuses introduced two years ago, at the outset of the crisis, with hard pegs the yuan to the dollar. This might be a return to a gradual revaluation of the Chinese currency. These actions entail the reassessment of the cost of production in the world and in China to produce goods become more expensive. Thus, companies that produce everything from avtozapchastey to computers and mobile phones are likely to be forced to find a new production facility.

How quickly this happens, one can only guess. But the expansion of the corridor for the yuan, the most likely to lead to an increase in the cost of production in China in dollar terms. This in turn will affect the activities of companies that use China as a production site. Among them – Jabil Circuit Inc. (JBL), Hewlett-Packard Co. (HPQ) and Apple Inc. (AAPL).

Expansion of the corridor for the yuan – is the last of the reforms that led to the rise in the cost of production in China. This year, more than 20 provinces, including the industrial center of Shenzhen, there was an increase minimum wage. Last month, Honda Motor Co. Ltd. (HMC) has raised workers’ wages by 24%. June 2 Taiwanese Hon Hai Group, which supplies components for company Apple, HP, Motorola Inc. (MOT) and Sony Corp. (6758.TO, SNE) suggested that workers in its Chinese divisions of 30-percent bonus.

Companies are already beginning to feel the effects of the reforms.

On Tuesday, Jabil CEO Tim Main, discussing the results of its operations during the teleconference, told analysts that, “given the rise in production costs in China will be more profitable to produce goods in Mexico or Eastern Europe.” Mr. Mayne said that the company in these regions are “competitive” businesses, but did not specify whether already begun moving production there.

The point, of course, not only the cost of labor. With the strengthening yuan, some materials used in China, will become cheaper. Many types of raw materials, including energy and semiconductors, are estimated in dollars. If the yuan rise against the dollar, these goods will be cheaper for Chinese manufacturers.

With increasing appreciation of the yuan to 0.3 U.S. dollars, the total price the computer will increase by 5%, but the raw material cost can be reduced by 1%, estimates consultant Paul Fridenberg, former Deputy Secretary of the export department of the Ministry of Commerce. Question for Chinese manufacturers is to “kill them, this difference of 4% or they will be able to adapt”, – he said.

China is not the only one who had to abandon a fixed exchange rate in favor of floating. In 1986, Japan approved the strengthening of the yen. Initially, the Japanese export-oriented companies felt the reduction of profit. At the same time, they began to actively invest in the automation of production and especially actively began to develop car production.

The same trend we can see in the Chinese technology sector. Malaysia and the countries of Eastern Europe, perhaps will be more appealing, but the Chinese manufacturers do not descend from a distance through automation.

Revaluation of the yuan will force technology companies to pay attention to developing regions, but the interest in China is likely to remain high.

Analysts point out that the imbalance of the Chinese economy is so large that the revaluation would also be useful, as if the sinking of Titanic passengers began handing out buckets. Employee Peking University Minel Pettis actually predicts economic disaster in China, and a clear solution in sight. In his opinion, China will happen is the destruction of the capital market, which plunged earlier prosperous U.S. and Japan in a protracted depression. Light revaluation is not able to stop the country’s movement in this direction.

Anrey Torbinski
2010-06-25 22:10, Currency news.

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