International Business China Case Study

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International Business - China

Why is the value of the yuan relative to the dollar so important?

The Chinese government has the power to dictate the value of the yuan vs. The U.S. dollar. The fact is that a strong U.S. dollar makes it more difficult for American companies to export competitively and when the dollar is weak that can (and does often) reflect that imports are reduced and U.S. exports have more strength.

In other words, when China's yuan is very low against the dollar, Chinese exports are cheaper than American exports. Hence, it behooves China to keep its currency low, and on the other hand for American companies, they say that gives China an unfair advantage. According to the article "A Weak Dollar vs. A Strong Yuan," China has deliberately kept its yuan low, and this irritates the U.S. because American leadership (and Congress) argue that China should let the yuan appreciate or in other words China should encourage a stronger yuan. Some members of Congress call China out for manipulating its currency in order to give its companies an unfair advantage.

There is an irony within this situation and American companies are part of the irony. When it comes to manufacturing in China, about 60% of exports from China to the U.S. are not produced by Chinese-owned companies but rather are produced by American and other foreign companies operating in China.

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A big company from the U.S. that is manufacturing in China is Wal-Mart, which has over 5,000 non-Chinese suppliers providing merchandize for its many stores in America. Hence, Wal-Mart reaps huge benefits from the fact that China keeps the yuan at the lower end. That's the irony, and American company doing business in China is more than happy to keep the value of the yuan low so its profits are more substantial.

On the other hand, according to the article the U.S. dollar enjoys "an exorbitant privilege" because the dollar dominates in many countries. The U.S. is thus able to "borrow at a lower cost" and "print money at will," which does not always sit with the Chinese government, which has called for "an abandoning the dollar as a reserve currency." The Chinese government has suggested replacing the dollar with "Special Drawing Rights" (which has been promoted by the International Monetary Fund) as an international reserve instead of the U.S. Dollar.

Interestingly China, as America's number one creditor, holds about $2.2 trillion (allowing America to print money against these foreign exchange reserves. On the subject of those….....

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