S 2 Yuan 8.28/& -Yuan 6.90/& x100= 20% Yaun 6.90/$ Was Chinese Yuan politically or economically motivated? The reevaluation of the Chinese Yuan is seen to have been politically as well as economically motivated. To begin with, reevaluation of the Chinese Yuan can be seen to have been economically motivated which is evident from the public announcement of the People’s Bank of China on Reforming the RMB Exchange Rate Regime. From the public announcement the primary aim of reevaluation was meant to establish and improve the socialist market as well as China’s economic system ((Antweiler, 2010,pp. 5-23). Secondly, China’s current account surplus as well as financial account surplus had a significant room for currency management hence its revaluation was considered economically significant.
Throughout the 2004 and 2005, the United States government had continued to urge China to revalue the Yuan from its decade long peg to the United States dollar of Yaun 8.28/$. The United States government argued that the growing Chinese trade surplus with the United States indicated that the Yuan was significantly undervalued hence revaluing the Yuan would lead to increased as well as rapid growth of the country.
Since China is seen to be relatively cheap in terms of manufacturing costs, many multinational companies have established their companies in China hence reaping the benefits of low cost labour and production (Jeffries, 2006,pp. 56-78). Economically, the revaluation of the Yuan would steer economic growth in China with many small manufacturers establishing firm’s within china since the Yuan would gain strength over the dollar making the cost of manufacturing more expensive (Black, 2004, pp. 211-232). The increased costs of manufacturing eventually would discourage foreign multinational corporation investment though on the other hand it would encourage domestic investment.
Economic Critics were against the revaluation especially the Chinese exporters and multinationals enterprises with core manufacturing bases in China(Antweiler, 2010, pp. 5-23). From economic perspective a revaluation would possibly lead to an increase in the direct costs of goods which then would cause a decrease in their expected gross and operating margins in situations where the prices of the goods on the market are lower than the manufacturing costs involved. The impact of the revaluation therefore was expected to have both positive and negative effects on the Chinese companies with most of them suffering 2% increase in manufacturing cost in relation to the foreign market pricing(Antweiler, 2010, pp. 5-23).
Moreover, the Yuan’s new freedom to float incrementally over time presented many manufacturers with a new and growing operational risk from the current exchange rates over time. Most of the multinational companies like Mattel had invested in China for the main purpose of using China as a manufacturing company hence they had wished for the currency to remain relatively stable and cheap revaluation of the Yuan therefore would mean that in dollars or euro terms, the cost of goods sold would rise and the resulting margins and profitability reduced when those same products were sold in euro or dollar markets (Zhang, 2004,pp. 3-11).
For other companies such as Boeing, revaluation would have a marginally positive impact if any Boeing did little sourcing in China, but had been making larger and larger sales to china. The revaluation of the Yuan would slightly increase the purchasing power of Boeing’s Chinese customers, as it used U. S. dollar based pricing for its export sales, including those to China(Antweiler, 2010, pp. 5-23).
Other companies’ anticipated more complex competitive impacts since the revaluation was thought to be a small cost increase. Simultaneously, the revaluation of the Yuan was expected to give the Japanese yen a substantial boost in the international financial markets, driving the value of the yen up against the dollar and the euro(Zhang, 2004,pp. 3-11).