ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
expand_more
expand_more
format_list_bulleted
Related questions
Question
thumb_up100%
Why did the Chinese yuan
Transcribed Image Text:The Fluctuating Value of the Yuan Gives Chinese Businesses a Lesson in Foreign Exchange
Risk
Between 2015 and early 2018, the Chinese currency, the yuan, fluctuated significantly in value against the U.S. dollar, giving Chinese businesses an object lesson in the
importance of managing for foreign exchange risk.
From August 2015 through to December 2016, the value of the yuan in dollars depreciated by 12 percent from 6.2 to the dollar to 6.95 to the dollar. This depreciation was
triggered by a slowdown in the Chinese economy, which led to an outflow of capital from China. Even though the Chinese government spent heavily to try to prop up the
value of the yuan, using $1.5 trillion of dollar-denominated foreign exclhange reserves to purchase yuan, they could not halt the decline in its value against the dollar.
While the depreciation in the yuan boosted exports, it also resulted in an unanticipated increase in the yuan price of key imports, which raised costs for a number of Chinese
companies. About 980 listed Chinese companies reported combined foreign-exchange losses of 48.7 billion yuan in 2015, almost 13 times higher than 2014, according to data
compiled by Bloomberg. Hardest hit were Chinese airlines, many of which imported aviation fuel that was paid for in dollars. As the cost of fuel in terms of yuan went up,
their profits slumped. In total, the Chinese airline sector registered foreign exchange losses of 17.9 billion yuan for 2015, compared with 951.7 million a year earlier. The big
three state-owned airlines–China Southern Airlines Co, China Eastern Airlines Corp, and Air China Ltd-suffered 15.85 billion yuan in foreign-exchange currency losses in
2015.
In 2017, conditions reversed. Between January 2017 and April 2018, the yuan appreciated in value by 10 percent against the dollar, increasing from 6.95 to the dollar to 6.27
to the dollar. The appreciation was due to a number of factors, including a return to stronger growth in China and the election of Donald Trump in the United States. The
latter event seems initially to have reduced the confidence that foreign investors had in the United States and resulted in an outflow of capital as they sought to diversify their
holdings of foreign assets and currency. The dollar also fell after members of the Trump administration made statements suggesting that they were happy to see it decline,
because they believed it boosted U.S. exports.
The appreciation in the value of the yuan against the dollar from January 2017 onward reduced the yuan costs for Chinese companies that imported goods priced
Page 318
in dollars, such as aviation fuel. Thus, Air China noted in its 2017 annual report that a 1 percent gain in the yuan against the greenback can boost its net profits by
about 280 million yuan, primarily due to reductions in the cost of aviation fuel.
On the other hand, the appreciation of the yuan raised the dollar price of Chinese exports. Many exporters saw their profits squeezed as a result. In early February 2018,
Guangdong Goworld, a supplier to Apple, said in a stock exchange filing that it had suffered an estimated foreign exchange loss of 45 million yuan (US$7.2 million) in
January 2018 owing to a stronger yuan. The January figure alone was equal to 94 percent of its foreign exchange losses for the first three quarters of 2017. It also translated
into 34 percent of its net profits in the first nine months of 2017. The Shenzhen-listed company manufactures and sells printed circuit boards, liquid crystal displays (LCDS),
and ultrasonic electronic measuring instruments to developed markets, including the U.S., Europe, Australia, and Japan.
In another example, a spokesperson for Zhejiang NHU Co., a producer of vitamins, said that even as the vitamin export market experienced a boom in 2017, the company
suffered millions of yuan in foreign exchange losses. The basic problem was that the company negotiated dollar prices for its vitamins in 2016, but by the end of 2017, each
dollar of sales was yielding less revenues when translated back into yuan (thanks to the appreciation of the yuan). To deal with this problem, the company set up a team to
discuss the issue and employed means such as hedging and forward exclhange transactions to try to minimize foreign exchange risks.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- In 1971 a British company, Beecham Group, received a Swiss franc loan of CHF 100 million. By the time the loan was repaid in 1976, the British pound had depreciated significantly against the Swiss franc. Which of the following statements is correct? A. The cost in British pounds of making the repayment did not change. B. The financial manager of Beecham Group would not be concerned about the change in the value of the pound. C. The change in the value of the British pound increased the profitability of the Beecham Group. D. The cost in British pounds of making the repayment increased significantly.arrow_forwardWhat are the effects of a country's currency depreciation on its import and export activities?arrow_forwardwhich of the following cause a depreciation of domestic currency in the long run? (There are more than one answer) An increase in domestic price level An increase in productivity An increase in imports demand An increase in tariff An increase in export demandarrow_forward
- Why and how net exports and net capital flow are related to each other? If Saudi Arabia experience trade deficit does it necessarily create trouble for a county’s economic growth? Using Purchasing-Power Parity Theory, how nominal exchange rates of a country are determined in relation to other countries?arrow_forwardA Canadian professor is paid to teach a summer course in Singapore for 8 weeks. How is the transaction recorded on Canada's balance of payments accounts? debit: service trade; credit: capital and financial account debit: income balance; credit: capital and financial account debit: capital and financial account; credit: service trade debit: capital and financial account; credit: income balancearrow_forwardIf the European euro were to depreciate relative to the U.S. dollar in the foreign exchange market, would it be easier or harder for the French to sell their wine in the United States? Suppose you were planning a trip to Paris. How would depreciation of the euro change the dollar cost of your trip?arrow_forward
- What does it mean when the dollar appreciates compared to when the dollar depreciates? Has the US dollar been relatively strong or weak over the past year? How does the strength of the dollar affect exports and imports?arrow_forwardIf you know that the KD dinar has fallen by 10% against the Saudi Riyal, by how much the Saudi Riyal has appreciated against the KD Dinar? Given that one Kuwaiti Dinar (KD) equals 3.3 US$ while one Australian Dollar (AD) = 0.22 KD, what is the AD / US$. Note: use of chat gpt or any other ai bot is strictly prohibited.arrow_forwardA British pound costs $1.42 in U.S. dollars in 2018, but $1.55 in U.S. dollars in 2019. Was the pound weaker or stronger against the dollar? Did the dollar appreciate or depreciate versus the pound?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education