1. Too early to judge Chinese Yuan devaluation: US

Too early to judge Chinese Yuan devaluation: US

A day after China devalued its tightly-controlled currency by two per cent, the US has said it is too early to judge the full implications as it would continue to monitor how these changes are implemented.

By: | Published: August 12, 2015 9:13 AM
china yuan

A day after China devalued its tightly-controlled currency by two per cent, the US has said it is too early to judge the full implications as it would continue to monitor how these changes are implemented. (Reuters)

A day after China devalued its tightly-controlled currency by two per cent, the US has said it is too early to judge the full implications as it would continue to monitor how these changes are implemented.

“While it is too early to judge the full implications of the change in the PBOC reference rate, China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,” a spokesperson of the US Treasury Department said yesterday.

“We will continue to monitor how these changes are implemented and continue to press China on the pace of its reforms, including additional measures to transition to a market-oriented exchange rate,” the spokesman said.

“It is remains critical that China pursue policies that reflect its stated desire to move towards an economy driven primarily by household demand rather than exports, which is in China and America’s best interests. Any reversal in reforms would be a troubling development,” the Treasury said.

As Treasury Secretary Jacob Lew has consistently said, the US has continued to press China to continue financial reform, increase exchange rate flexibility, and move rapidly towards a more market-oriented exchange rate system, he noted.

“While additional reforms are needed, we have seen progress, including new commitments from China that the United States secured at the most recent Strategic and Economic Dialogue to move towards a more flexible, market-determined exchange rate, limit foreign exchange intervention, and increase the transparency of its exchange rate policies. But more progress is needed,” the spokesman said.

Alleging that China has manipulated its currency for a long time, Senator Chuck Grassley said this is just the latest example, and it is past the time to do something about it.

“Administrations under both Democrat and Republican presidents have been too timid about taking action, and China has taken advantage in the meantime. The Obama Administration ought to consider everything at its disposal to address China’s currency manipulation,” he said.

Noting that currency policy also is an outstanding issue in the Trans-Pacific Partnership negotiations, according to the Administration, Grassley said the US needs enforceable currency provisions in trade agreements.

“We need to take action to address currency manipulation by the world’s second-largest economy,” he said. Today’s action comes after a period of appreciation, and it remains to be seen if today’s move is a one-time action or the beginning of prolonged intervention, Senator Sherrod Brown said.

“Given China’s history of currency manipulation, this depreciation must be monitored closely. Besides, the US needs to ensure American businesses and workers have a backstop to fight back against currency manipulation. That means passing our bipartisan bill to punish currency manipulation and demanding rigorous currency disciplines in TPP, which China may seek to join at a later date,” Brown said.

According to American Iron and Steel Institute, the action by the Chinese government to devalue its currency is further illustration of its active role in manipulating the value of its currency to promote Chinese exports.

“China has consistently intervened directly in foreign exchange markets to control the value of the yuan versus the US dollar to make their exports more competitive and impose new barriers to imports. Our government must address the massive damage that China’s undervalued currency is causing to our nation’s manufacturing sector, especially the steel industry,” said its president and CEO Thomas J Gibson.

The Wall Street Journal said the devaluation of currency suggests China’s leaders are looking for new ways to rev up growth as other methods look increasingly ineffective, raising the possibility of further and more dramatic efforts to come.

Yesterday’s move shows Beijing is struggling to balance propping the economy with economic reform, it said.

“The Chinese leadership is shifting toward stabilising growth rather than accelerating reforms such as opening the country up for freer cross-border capital flows, according to the Chinese officials and advisers to the government,” the daily reported.

In a surprise move, China yesterday devalued its tightly- controlled currency by two per cent, the biggest one-day fall since a massive devaluation in 1994, as the world’s second- largest economy grappled with economic slowdown and dwindling exports.

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Tags: Yuan
  1. Hemen Parekh
    Aug 12, 2015 at 4:42 pm
    What is the significance behind following recent announcements ? # Indian company , Apollo Tyres will invest 475 million Euros , to set up a tyres manufacturing plant in Hungary ? # Chinese company , Foxconn will invest $ 20 billion , to set up 10-12 factories in India , in next 5 years ? My guess : # For manufacture of tyres , Apollo finds that labour-costs in Hungary are lower than the same in India . Also , that it has a huge export-market for its tyres in Europe , so it makes sense to set up a plant nearby in order to reduce transport costs # Same reasons for Foxconn , for its electronic products , sold world-wide Conclusion : # Each country enjoys certain " Compeive Advantage " ( over other countries ) , at a given point of time , for a given product or service In present cases , that could be , " Labour Costs " But " Compeive Advantages " are transient ! Never permanent ! And these may not be the same for ALL products or services , at ALL times ! Eg: For a highly automated product like a " Integrated Computer Chip " , labour costs are an insignificant percentage of total manufacturing costs , whereas Capital Costs ( plant / machinery ) are a major element For this reason , for manufacture of such chips , countries having low labour costs , cannot claim that as an advantage Again , capital intensive manufacturing needs huge amount of finance, where India is at a " disadvantage " , vis-a-vis developed countries , due to its very high rate of interest on borrowing So , each country , has to remain on constant look-out for its own compeive advantages , at each point of time (- and before it ceases to be an advantage ) In case of Foxconn , its Chairman Gou , even went to the extent of saying : " In our Maharashtra-based factory , we will employ labour-intensive manufacturing processes " What he meant ( but did not say ) : " Only till such time , Indian labour-costs rise and catch up with the labour costs in our Chinese factories - where , we have started installing robots " That reminds me of the incidence ( reported in book " Steve Jobs " ) where President Obama , asked Steve Jobs to stop outsourcing Apple products to Foxconn and move their manufacture to USA , in order to create jobs in USA Steve's answer ( - since , he never minced his words ! ) : Over my dead body ! [ And Obama dare not ask this question to current Apple CEO , Tim Cook , who continues with the same " Competing Policy " for last 4 years ! ] Obviously , Steve had no love lost for jobs of his fellow citizens ! It is no different with Foxconn Chairman Gou , whose only concern is to keep Foxconn , globally compeive , no matter , where it manufactures its products - any exhortation from President Jin Ping , notwithstanding ! And , I get a feeling , that if PM Narendra Modiji , were to try and persuade Apollo Chairman , Shri Kanwar , not to put up that plant in Hungary but set it up in India to create jobs in India , he might get a somewhat similar - but of course , a vastly polite - answer ! Within past 12 months , India's trade imbalance with China has gone up from $ 36 billion to approx $ 48 billion With yesterday's devaluation of Chinese Currency by 2 % , this may get worse Of course , this devaluation , will not lower the labour costs in China , which will still keep rising So , devaluation can only be a " Transient Compeive Advantage " for the Chinese Manufacturers ! On the other hand , of the final cost of a " Manufactured Product " : > labour costs = 10 % - 20% > material costs ( including bought-out components ) = 50% - 60% > overhead costs ( selling / admin / advt / interest etc ) = 20 % - 40 % So , how much of " Final Cost " can be reduced by a 10 % increase in : > Labour Productivity ( thru mechanization / automation ? ) > Materials Productivity ( thru Vendor Development for better quality ? ) > Overhead Productivity ( thru Computerization of Manual Systems ? ) It would seem to me that , as far as increasing our "Compeive Advantage " in Manufactured Products is concerned , the same lies in increasing our " Materials Productivity " Our top most priority should be upgrade the capabilities of our 40-50 Million MSME ,from whom the organized large companies , purchase components / sub-emblies Large companies should focus on R&D / Design / Buying / Final embly and Quality Control , leaving manufacture of components / sub-embly to MSME units Only this can help us to continuously increase our Compeive Advantage , even as labour costs keep rising in the large exporting companies ---------------------------------------------------------------------------------- hemen parekh 12 August 2015 B2BmessageBlaster

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