The Chinese Yuan: The Revaluation Dilemma (Page 2)

Abstract

With China coming to occupy a central place in the global economy, the country's economic policies are attracting significant international attention. The Chinese government has indicated that it intends to liberalize capital controls.

Meanwhile, the Yuan has been pegged to the dollar for a decade. There is a widespread belief that the Yuan has become significantly undervalued. But senior Chinese politicians believe that China cannot let its exchange rate move more freely before it fixes its weak banking system. Otherwise, there will be a large outflow of capital.

China seems intent on relaxing capital controls before setting its exchange rate free. Is China better off moving cautiously in liberalizing its capital account, and moving more rapidly towards greater exchange-rate flexibility? What should China do?

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China had been the largest economy for much of recorded history.Until the 15th century, Most of China's growth over the past quarter-century had been due to the high rates of investment and the movement of workers from subsistence farming to more productive use in industry. But good infrastructure, an educated workforce, a high rate of saving and an extremely open economy, had also been significant growth drivers.

China's average tariffs had fallen from 41% in 1992 to 6% after it joined the WTO in December 2001, giving it the lowest tariff protection of any developing country. Many non-tariff barriers had also been dismantled. China's GDP accounted for 13% of world output (at purchasing-power parity), second only to America's. At the end of 2004, China was the world's third-biggest exporter (after America and Germany)....

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THE CHINESE FINANCIAL SYSTEM

THE ROAD AHEAD

EXHIBIT I CHINA

EXHIBIT II CHINA'S ECONOMIC INDICATORS

EXHIBIT III CHINA'S ECONOMIC INDICATORS (PROJECTIONS)

EXHIBIT IV CHINA'S GDP GROWTH, 1992-2004 Q1

EXHIBIT V CONSOLIDATED FISCAL POSITION HONG KONG, CHINA, FY 1998-2004

EXHIBIT VI CHINA'S ONE-YEAR BANK LENDING RATE, %

EXHIBIT VII CHINA'S CONSUMER PRICES (% CHANGE ON A YEAR EARLIER)

EXHIBIT VIII CHINA'S CAPITAL ACCOUNT, 1994-2003

EXHIBIT IX CHINA'S CURRENT ACCOUNT, 1994-2003

EXHIBIT X CHINA'S FOREIGN TRADE

EXHIBIT XI IMPORTS AND EXPORTS OF GOODS AND SERVICES AS PERCENTAGES OF GDP

EXHIBIT XII MERCHANDISE EXPORTS TO AND IMPORTS FROM CHINA 2003 ($ BILLION)

EXHIBIT XIII CHINA'S EXPORTS, % OF WORLD TOTAL

EXHIBIT XIV TRADE BALANCE (CHINA VS JAPAN), % OF GDP

EXHIBIT XV CHINA'S OFFICIAL FOREIGN EXCHANGE RESERVES, 1991-2004 Q1

EXHIBIT XVI CHINA'S EXCHANGE RATE

EXHIBIT XVII CHINA'S RENMINBI REAL TRADE WEIGHTED EXCHANGE RATE INDEX 1994-2004

EXHIBIT XVIII YUAN SHIFT

BIBLIOGRAPHY

        Case Code   ECOA132
   Case Length    16 Pages
              Period    -
 Organization     -
        Pub Date     2005
Teaching Note    Not Available
     Countries    China
      Industry    -

Issues                 -

China, The Yuan, Pegged to the dollar, China's Economic Policies, Chinese Government, Liberalizing capital controls, Weak banking system, Relaxing capital controls and Greater exchange-rate flexibility.

Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.