YUAN/RENMINBI

AN INTERNATIONAL CURRENCY
????
 ITS NOT WORLD WAR 1

ITS NOT WORLD WAR 2

NIETHER IT’S A COLD WAR

THIS TIME IT’S A CURRENCY

WAR
THIS TIME IT’S A CURRENCY WAR
WHAT DO YOU MEAN BY WORLD CURRENCY

 In the foreign exchange market

 It refers to a currency in which the vast

majority of international transactions take
place

 which serves as the world's primary reserve

currency.
 HISTORY OF GLOBAL CURRENCY

• Spanish dollar (17th - 19th

centuries)

• Gold Standard (19th - 20th

centuries)
 Yuan an international currency
current scenario of CHINA

• China Economy 4th Largest Economy by nominal GDP.

• China stands as the 2nd largest economy in the world

measured by domestic PPP (purchasing power) measure,
at about $10 trillion USD.

• Economic output for 2006 was $2.68 trillion USD. Its per
capita GDP in 2006 was approximately US $2,000 (US
$7,600 with PPP), still low by world standards (110th of
183 nations in 2005), but rising rapidly.
• Since 1978 the People's Republic of China
(PRC) government has been reforming its
economy from a Soviet-style centrally
planned economy to a more market-oriented
economy while remaining within the political
framework provided by the Communist Party
of China.

• Poverty rate down from 53% of population in

1981 to 8% by 2001.
 INFLATION CHART
CHINA UNITED STATES AMERICA
China contributed 20 percent of global growth in 2007 - IMF

CHINA UNITED STATES AMERICA

US DOLLAR THE CURRENT INTERNATIONAL
CURRENCY CURRENT SCENARIO OF USA
• UNITED STATES OF AMERICA

• US Economy

• GDP of more than $13 trillion constitutes 22 percent of the gross

world product.

• 79% of total workforce is employed in the service sector.

• The US is the largest importer of goods and second largest exporter.

Canada, China, Mexico, Japan, and Germany are its top five trading
partners.
Steps taken to keep Renminbi at pegged level
& what where the severe problems faced by us

Chinese central bank had to supply Renminbi

and demand dollars in foreign-exchange
markets.

US producers have to compete with Chinese

cheap products due to undervalued Renminbi.
Steps taken to overcome problems
• a tariff of 27.5 percent was announced on
Chinese imports until China adjusted the value
of its currency

• In July 2005, China announced that it would

move in the direction of a floating exchange
rate.
 Yuan as a reserve currency
 
Likely prospects & possible implications

• Forecasts by some analyist

• Decline of the dollar and the rise of the Yuan as
the dominant reserve currency.
• China will need to make the Yuan convertible,
create deep and liquid.
• will take China 15-20 years to put in place the
conditions necessary
• The Yuan is set to become one of the major
reserve currencies sometime after 2030
 RISING DRAGON FALLING EAGLE
• Following the creation of EMU, some observers
predicted .
• More recently, eurozone travails and rapidly rising US
indebtedness have re-ignited the debate .
• The possible contenders for ―top currency status are
the yuan and the euro
• Neither the UK nor Switzerland, nor Japan have the
necessary economic and financial size for their
currencies to become the world’s dominant reserve
currency.
 Implications for China’s Economy
• If the Yuan is undervalued.

• What can an undervalued currency do?

• An undervalued currency makes imports

more expensive.

• In the short run

 Implications for the U.S. Economy
Effect on Exporters and Import-Competitors

• What has china become.

• A large share of China’s exports to the United
States is labour-intensive. Consumer goods
A) Toys and games
B) Textiles
C) Apparel
D) Shoes
E) consumer electronics
 U.S. - China Trade and Manufacturing Jobs
• Critics of China’s currency.

• low value of the Yuan

• significant effect on the U.S. manufacturing sector

• 2.7 million factory jobs have been lost since July 2000.

• No clear link between job losses and imports from China

• only some manufacturers export to China

• The economic recession and subsequent “jobless

recovery.

• Trade deficit has not been limited to China

• there is a long-run trend that is moving U.S.

production away from manufacturing and toward
the service sector
 Net Effect on the U.S. Economy
• In the medium run
• it leads to a compositional shift
• consumer durables would be expected to benefit
from lower interest rates
• it is expected to have no medium- or long-run
effect on aggregate U.S. employment or
unemployment.
• the overall unemployment rate has fallen from
6.3% in 2003 to 4.5% in February 2007
 Pre-conditions for becoming a reserve currency

• The size of the economy

• Low inflation and exchange rate stability

• Deep and efficient capital markets

• Political stability and geo-political strength

 Changes to the Current Currency Policy and
Potential Outcomes
• If the Chinese were to allow their currency to float.
• How the value would be determined.
• How would the floating currency appreciate
• What would boot u.s exports
• The U.S. bilateral trade deficit would likely decline.
• Chinese central bank would no longer purchase U.S. assets
.
• U.S borrowers would now have to find out new lenders.
• If the relative demand for Chinese goods and assets were
to fall.
 Towards a multiple reserve currency system

• It will take 15 to 20 years for yuan to become an

international currency.
• Factors which will help yuan to be a leader .
A) Economic size
B) Foreign trade
C) Financial market size
• It depends upon biejing willingness to allow the
financial markets to grow.
• Yuan convertibility will lead to foreign investments
 Consequences
Potential benefits
• Lower transaction costs and lower exchange
rate uncertainty

• Improved terms-of-trade

• International competitiveness

• The world’s banker

 Consequences
Potential drawbacks
• The reserve currency will tend to be overvalued

• International scrutiny and pressure

• Fall from grace

• The risk of greater instability of demand for

money
 Conclusion
• China should allow Yuan to appreciate slowly.

• US government should try to increase the

investment part in the economy.

• Work on their respective economies and should

balance the structure of savings and consumption.
 Credits
• Pratik Ahluwalia 891101

• Fatema Khambati 891133

• Fatema Lokhandwala 891136

• Pratik Mehra 891141

THANK YOU