Assessing the Likelihood of RMB
Devaluation
Hung-Gay Fung
University of Missouri-St. Louis

 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 .

 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

China
South Korea
T hailand
Indonesia
U.S.
Population Real GDP Growth Per Capita GNP
1997 91-95 96 95
1,226
45
59
209
267
12.0%
7.5%
8.5%
7.8%
1.9%
9.6%
7.1%
6.4%
8.0%
2.5%
$ 620
$ 9,700
$ 2,740
$ 235
$ 26,980
Source: Worldbank, 1997

 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

 Under pressure to devalue its currency.
 Risk of a Chinese RMB devaluation…?

 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.

 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)

 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...

 Very high end product
 Middle market
• alliance - world, corporate and consumer
• regional rebalancing

 Production Costs
 Productivity
– modernized plants
– education of labor force