Slide03 (Fin4400) Yuan

Revaluing the Chinese
Yuan
A case study in a government’s change in the valuation and management
of its increasingly global currency
Revaluing the Chinese Yuan:
Case Questions
1. Many Chinese critics had urged China to revalue the yuan by 20% or
more. What would the Chinese yuan’s value be in U.S. dollars if it had
indeed been devalued by 20%?
2. Do you believe the revaluation of the Chinese yuan was politically or
economically motivated?
3. If the Chinese yuan were to change by the maximum allowed per day,
0.3% against the U.S. dollar, consistently over a 30 or 60 day period,
what extreme values might it reach?
4. Chinese multinationals would now be facing the same exchange rate-
related risks borne by U.S., Japanese, and European multinationals.
What do you believe would be the impact of this rising risk will be on
the strategy and operations of Chinese companies in the near-future?
3-2
Revaluing the Chinese yuan
• They started talking about something that wasn’t very useful then started
to collect mobile phones and BlackBerrys,” said a banker who was briefed
later. The Chinese then distributed a four-point statement: Beijing was
unlinking the yuan from the U.S. dollar effective immediately.
“Behind Yuan Move, Open Debate and Closed Doors,”
The Wall Street Journal, July 25, 2005, pg. A1.
• "This a cautious move," said Zhong Wei, a finance expert at Beijing

Normal University. "This is more like a political stance than real currency
reform."
“China Ends Fixed-Rate Currency,” Peter S. Goodman,
The Washington Post, July 22, 2005, pg. A01
3-3
Revaluing the Chinese yuan
© 2005 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada. 1/Jan/1994 - 30/Sep/2005
3-4
Revaluing the Chinese
Yuan: Case Questions
1. Many Chinese critics had urged China to revalue the yuan by
20% or more. What would the Chinese yuan’s value be in U.S.
dollars if it had indeed been devalued by 20%?
• If the yuan had been revalued to Yuan 6.90/$, it would have
constituted an increase in its value by 20% against the U.S.
dollar
Yuan 8.28/$ - Yuan 6.90/$
X 100 = 20.0%
Yuan 6.90/$
• This is the percentage change calculation of

S1 - S2
X 100 = 20.0%
S2
• Which, if using 20% or 0.20, can also be rearranged as

S 2 = S 1 ÷ 1.20
5
Case Questions
2. Do you believe the revaluation of the Chinese yuan was
politically or economically motivated?
• This is a matter of opinion. The primary pressure on China to
revalue the yuan was, however, political in nature.
• China’s current account surplus and financial account surplus
allows it significant room for currency management. By revaluing
the currency, although minor in size initially, it did show the
Chinese government’s willingness to listen to some of its critics.
• Economics would argue against the revaluation if that was the sole
consideration. For Chinese exporters, or multinational enterprises
with manufacturing bases in China (cost-bases), a revaluation
would increase their direct costs of goods sold which would
decrease their gross and operating margins if they were unable to
pass the higher costs along into final prices.
3-6
Case Questions
3. If the Chinese yuan were to change by the maximum allowed per day, 0.3%
against the U.S. dollar, consistently over a 30 or 60 day period, what
extreme values might it reach?
• All the following outcomes follow the calculation as shown here for the 30
day revaluation:
Yuan 8.11/$
Value at end of 30 days = = Yuan 7.41/$.
( 1 + 0.003 ) 30
• If the yuan were to revalue by 0.3% per day for 30 days against the U.S.
dollar, assuming an initial value of Yuan 8.11/$, its value at the end of 30
days would be Yuan 7.41/$.
• If the yuan were to revalue by 0.3% per day for 60 days against the U.S.
• If the yuan were to devalue by 0.3% per day for 30 days against the U.S.
• If the yuan were to devalue by 0.3% per day for 60 days against the U.S.
7
Case Questions
4. Chinese multinationals would now be facing the same

exchange rate-related risks borne by U.S., Japanese, and
European multinationals. What do you believe would be
the impact of this rising risk will be on the strategy and
operations of Chinese companies in the near-future?
• Chinese multinationals will now increasingly face the multitude of
currency risks – transaction exposure, operating exposure, and
translation exposure – faced by multinational firms resident in
floating currency markets like that of the United States, Japanese
yen, and European euro.
• As the following chapters will describe, this rising currency risk
will affect every dimension of their sales growth, profitability, and
general competitiveness from this point onwards into the future.
Life and business was certainly easier under the previous fixed
exchange rate regime.
3-8
The Future Global Currency
Landscape?
¥ The yen has a shrinking presence in global
economics and financial markets
Dollar’s sphere of influence:

* North America The euro’s sphere of influence
* Central America
* South America
* South Asia
$ ≈ 70%
of all trading € extends throughout Central
and Eastern Europe to Africa
and the Middle East
* East Asia/Middle East
Some indications are that the

dollar is falling in power and
YUN
influence globally.
Chinese yuan (YUN) or renminbi (Rmb) continues to grow in

influence in parallel with that of the Chinese economy
• July 2005 restructuring of the yuan is its first step towards

becoming a stronger and stronger player
•Chinese government will strive to maintain an equal

footing/balance against the $ and the €
3-9

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Revaluing the Chinese

• "This a cautious move," said Zhong Wei, a finance expert at Beijing

• This is the percentage change calculation of

• Which, if using 20% or 0.20, can also be rearranged as

4. Chinese multinationals would now be facing the same

Dollar’s sphere of influence:

Some indications are that the

Chinese yuan (YUN) or renminbi (Rmb) continues to grow in

• July 2005 restructuring of the yuan is its first step towards

•Chinese government will strive to maintain an equal

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