2. Presented By:
0 Ankit sachdeva
0 Chetan chauhan
0 Kanika goswami
0 Neha dhoot
0 Raghav kumra
0 Taqweem ahmed
0 Manan shah
2/25/2012 2

3. Introduction
“We are very concerned about the negative impact of
(China’s) policies on our economic interests”
- US Treasury secretary Timothy Geithner.
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4. …..
0 The tough talk comes amid concerns that the global currency
order is unraveling, with countries breaking ranks in a `beggar-
my-neighbour’ use of 1930s-style devaluation to help exporters
and shore up their economies.
0 U.S.-China economic ties have expanded substantially over the
past three decades.
0 China is currently the second-largest U.S. trading partner, its
third-largest export market, and its biggest source of imports.
0 U.S. imports from China have risen much more rapidly than U.S.
exports to China, the U.S. merchandise trade deficit has surged,
rising from $10 billion in 1990 to an estimated $273 billion in
2010.
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5. ..…
0 While most of China’s major economic competitors around the
world have seen their currencies climb against the dollar the
Chinese Yuan has been virtually unchanged.
0 It’s a primary reason China has been able to achieve such a rapid
rise in global economic power.
0 Prior to the financial crisis, the U.S. was on its own to convince
China to adopt a more “flexible currency regime”.
0 The results were modestly successful — only after the U.S.
Congress threatened to impose a tariff on Chinese imports! China
allowed its currency to appreciate by 17 percent against the
dollar between 2005 and 2008.
0 But since the financial crisis, China has returned to a peg against
the greenback.
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6. Background
0 The international monetary system came into
existence since the 19th century.
0 After 1870 many countries adopted gold
convertibility.
0 Under the gold standard each currency was defined in
terms of its gold value.
0 One dollar was defined to be equal to the value of
23.22 grains of pure gold or 20.67 US Dollars per
ounce.
0 The gold standard broke down during World War 1
but was brought back in 1925.
2/25/2012 Chetan Chauhan 6

7. …..
0 In 1931 due to massive gold and capital outflows,
Britain departed from the gold standard.
0 In January 1934 the US President Franklin
Roosevelt increased the price of gold from US$20.67
to US$35.00 per ounce.
0 In July 1944 delegates from 44 nations came
together at the Nations Monetary and Financial
Conference at Bretton Woods to discuss post war
recovery.
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8. …..
0 The conference led to the creation of two
international organizations- the IMF and the
International Bank for Reconstruction and
Development(now World Bank).
0 Bretton Woods system –exchange rate as agreed by
member countries.
0 The Bretton Woods system ended on August 1971.
0 In the 1970s the Bretton Woods system was replaced
by floating exchange rates which even continued as of
2007.
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9. CURRENCY IN CHINA
0 Establishment of People’s Bank Of China (PBC) and
Issue of Renminbi (people’s currency).
0 The foreign exchange rate of the Yuan was fixed taking
into account price comparisons of China’s imports and
exports.
0 Fluctuations in Yuan-Dollar Exchange Rate and Dual
Track Currency System in China.
0 China becomes member of WTO.
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10. …..
0 US’s dissatisfaction and concerns for Chinese
manufacturers’ subsidies and the undervalued Yuan.
0 Zhou’s statement in defense of China’s currency
policy.
0 “A stable Yuan is in the interests of China and the
world.”
0 US Senators propose legislation imposing 27.5 %
tariff on all Chinese Imports.
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11. CHINA SOFTENS ITS STAND
0 On 21st July 2005 china introduced the new exchange rate
known as “CRAWLING PEG”.
0 Yuan was referenced not just to USD but to a basket of
currencies.
0 The Chinese central bank announced that the closing price
of the market each working day would become the central
parity rate for the following day.
0 The fluctuations allowed by PBC:
USD/CHINA – 0.3% above or below the CPR
CNY/MYR & CNY/RUB – 5% above or below CPR
Other currencies 3% above or below CPR.
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12. CENTRAL PARITY RATE:
CPR(Thursday) CPR(Wednesday)
USD/CNY 6.2947 6.2939
HKD/CNY 0.81174 0.81154
JPY/CNY(Per 100 Yen) 8.1164 8.0945
EUR/CNY 8.2848 8.3161
GBP/CNY 9.8994 9.9226
AUD/CNY 6.7451 6.7291
CAD/CNY 6.2887 6.2895
CNY/MYR 0.48086 0.48097
CNY/RUB 4.7587 4.7710
* Data as on 22th Feb, 2012
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13. …..
0 Chinese decision to peg currencies with the basket of
countries welcomed by Jim McCormick ,Global head of
Lehman Brothers.
0 The decision indicated that the Chinese were moving
towards a flexible exchange rate system.
0 The decision was welcomed by various economists
and even IMF was satisfied with this decision however
Morris Goldstein, a scholar from Institute of
International Economics were of a different view
which made the revaluation of YUAN a bit skeptical.
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14. YUAN’S REVALUATION
0 Chinese Government hinted for change in reforms
over time.
0 21st July : New exchange rate was announced
0 China adopted a managed float system with many
government controls still in place.
0 Yuan strengthened to 8.11 from 8.28 to a dollar.
0 27th July : Central bank announced no further changes
in the value of Yuan.
2/25/2012 Neha Dhoot 14

15. …..
0 These conflicting announcements left a more
confused view of China’s policies.
0 On one hand it seemed to move towards liberalization
of the exchange rate system.
0 On the other, China still looked inclined towards
managing the currency tightly.
0 Change in policy had very less effect on Yuan-US
dollar.
0 Yuan showed little appreciation against USD even
when most other currencies in the basket appreciated.
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16. …..
0 In 2006, China became the 2nd largest trading partner of US,
with trade valuation at US$ 281 billion.
0 The US trade deficit with China went up to US$ 232.5
billion.
0 On the other hand, China’s foreign exchange reserves
crossed US$ 987 billion.
0 China was increasing its reserves to keep the Yuan weak by
absorbing excess dollars in the market and issuing the Yuan
instead.
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17. 2/25/2012 Neha Dhoot 17

18. Flipside of the coin
0 A trade surplus does not constitute any proof of the currency being
undervalued:
 China-sans-Hong Kong shows trade surplus but China-plus-Hong
Kong does not run big trade surpluses
0 Fear of a fall in foreign investments and a slowdown in the domestic
economy:
 Stronger Yuan could lead to a fall in China’s agricultural exports ,
resulting in low incomes for the Chinese farmers
0 Apprehensive about the transition to a floating exchange rate system:
 Chinese banks burdened with sizeable non performing assets would
not be able to deal with speculative pressures arising from the
floating exchange rates.
2/25/2012 Raghav Kumra 18

19. 0 ¥ Has appreciated with
respect to $.
0 Decrease in foreign
investment
0 Slowdown in Chinese exports
¥ 0 Adversely affect the growth
0 Increase in import of food
articles
0 Decrease in price of domestic
food products
0 Decrease in agricultural
export
0 Lowering the income of
farmers
Quantity of $
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20. …..
0 Growing trade deficit was not due to an undervalued Yuan.
0 Infact, Low savings rate in US contributed largely to the
trade deficit. (refer table)
0 The undervalued Yuan forced Chinese banks to invest
the dollar earnings in US treasury securities, which
helped to keep the interests rates in the US low:
 Today China tops the list of Major Foreign Holders of Treasury
Securities with around US$ 1100.7 billions worth of treasury
securities.
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21. US and China Compared Savings,
Investment and Consumption as a
Percentage of GDP
China US
Gross savings as percentage of GDP 49.8 13.5
Household Savings Ratio 30.0 -0.3
Private Consumption as a % of a GDP 39.9 70.0
Gross fixed investment as a % of GDP 44.4 16.7
Gross National Savings as % of gross national 12 69
investment
Current account balance as a % of GDP 5.2 -6.5
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22. …..
0 The undervalued Yuan lowered the price of imports
from China, thereby increasing the purchasing power
of the US Consumers.
0 Low priced imports of Chinese manufactured
products aided the manufacturing sector of US.
0 The difference in key interest rates between the US
and China was more than 300 basis points.
0 The job losses in the US manufacturing sector had
been due to the economic recession in the US.
2/25/2012 Raghav Kumra 22

23. …..
0 China continued to be a large market for US
products.
0 The mutually beneficial relationship between
them would have been disrupted by imposing
tariffs on Chinese goods.
0 US trade deficit was growing at more or less
the same rate with the rest of the world.
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24. Current Scenario
0 The U.S. goods trade deficit with China increased $68.5 billion in
2010, and was responsible, alone, for nearly three-quarters
(72.6%) of the growth in the U.S. current account deficit.
0 Between 2000 and 2010,Chinese share raised from 3.9% to 10.5%,
while the U.S. share declined nearly a third, from 12.3% to 8.5%
in the export market.
0 Revaluation would improve the U.S. current account balance by
up to $190.5 billion.
0 2.25 million U.S. jobs and reducing the federal budget deficit by
up to $857 billion over 10 years.
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25. Outlook
0 In early 2007, China was a major market for US
companies and an important source of capital for the US
economy.
0 Yuan-US dollar exchange rate remained at levels similar
to late 2006.
0 There were no indications that the Yuan would be
revalued in the near future.
0 Exchange rate on 26 April, 2007 was 7.7265 Yuan to the
US dollar.
2/25/2012 Taqweem Ahmed 25

26. …
0 2006-07: China recorded a GDP growth of 10.5% and
increased exports by 25%.
0 China was one of the world’s largest importers of raw
materials and one of the largest exporters of
manufactured goods.
0 Also it was the world’s third-largest importer, behind
only the US and Germany.
0 Cheap Chinese products captured the world markets- low
prices lured the shoppers.
2/25/2012 Taqweem Ahmed 26

27. …
0 China’s increasing share in the world trade prompted US
government officials to express dissatisfaction over the
pace at which China was moving toward a floating
exchange rate system.
0 China’s currency was appreciating at a fast pace- the
value of which was not market determined.
0 Most economists were not in favor of this sudden
revaluation.
0 On the other hand, China continued to deny US
allegations of currency manipulations, claiming its
currency policy was shaped by national interest.
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28. .….
0 In march 2007 US Department of Commerce
announced the imposition of penalty tariffs on the
imports of coated free sheet paper from China.
0 According to Carlos Gutierrez, preliminary duties of
between 10.9% & 20.35% would be applied to the
coated paper imports from China.
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29. ..…
0 Amidst Chinese opposition several producers in US
demanded imposition of trade sanctions against
China.
0 Many economists were of the view that trade
sanctions would backfire and hurt US producers.
0 US companies in business with East Asia were also
expected to bear the brunt of this fallout.
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30. …..
0 It was generally believed that if China allowed the
Yuan to appreciate, it would result in a rise in prices in
the US as well as in several countries.
0 As per XEA Report Yuan was expected to appreciate
by 5 percent against US dollar by 2007 end.However,
Chinese wanted it to be a little slower, and so decided
to take the measures to strengthen the value of Yuan.
2/25/2012 Manan Shah 30

31. Reasons for US CHINA TRADE DEFICIT
0 China restricts access to its markets while
aggressively
0 supporting exports by its domestic firms.
0 China’s low-wage/low-cost advantage.
0 China’s artificially undervalued currency.
0 Americans Consuming, not Saving
0 Relocation of Exports to China from elsewhere in Asia
0 Over counting China exports: Example Apple’s iPod
0 Undercounting U.S. sales
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