In the near-term, even a relatively small shift in currency rates can have a big impact on the bottom line.
#China exchange rates drivers#
In particular, it is important to get a deeper understanding of the drivers and scale of the change in the dynamics underlying China’s currency policy. Among the most obvious factors is that a depreciated currency will likely do more to suppress import levels than to stimulate export levels-which has a direct impact on consumer demand and growth. That means they may need to reassess their underlying assumptions around the forces governing China’s currency policy and its outcomes, and how they monitor changes in the currency and risk mitigation efforts. So whether sourcing from China or building market presence, it’s important for finance chiefs to understand that China’s currency may be at an inflection point. In the meantime, the Chinese government is also investing hard currency to maintain stability in the RMB.ĬFOs obviously play a strategic role in assessing investment opportunities and levels. The International Monetary Fund has responded to China’s request to have the RMB added to its basket of Special Drawing Rights 2 currencies with a postponement and specific conditions, pending more work on the RMB. One other factor is the country’s desire to promote the RMB as a reserve currency. This and other major factors, such as preventing domestic inflation in key, imported commodities and decreased interest from outside investors in Chinese equities and bonds, appear to be obliging the PBoC to spend foreign reserves to maintain a floor under the renminbi. While China has traditionally tried to keep its currency competitive against others to help boost exports, that policy appears to have given way to one weighted toward preventing a destructive level of depreciation of the RMB, reflecting China’s growing role as a big player in global capital markets. Moreover, estimates are that anywhere between RMB two trillion and RMB four trillion in new credit may be needed to stabilize the A-share market, increasing China’s already mammoth money supply. To do so, China spent $94 billion in reserves in August, and those levels are down about $400 billion from their peak a year ago. But market pressures kicked in, and authorities have subsequently been trying to stabilize the currency at a rate of about 6.4 RMB to the dollar. In response, the People’s Bank of China (PBoC) devalued the currency in a surprise move in August, shaking world markets in the process, initially with a 1.6 percent move in the administrative trading band. Recently, however, as the US dollar (USD) has gained strength against other major currencies, most notably the euro, the RMB has risen with it, impacting China’s export competitiveness in Europe and some emerging markets, as well as the price of many goods imported into China.
In 2005, China announced the RMB would trade within a band against a basket of major currencies. There is also the potential for new growth opportunities in Asia and beyond, as market forces lead China to settle into a more sustainable growth pattern, commodity prices stabilize, China’s massive enterprises are perforce put on a more commercially oriented reform path, and the Chinese currency evolves toward a more stable instrument for global trade and investment. For example, many of the “playing field” issues that have challenged MNCs in Mainland China and in facing Chinese competition for acquisitions and market share in third countries may level off. On the other hand, the domestic and global impact of China’s slowdown may have outcomes, not entirely negative, for both Chinese and non-Chinese MNCs, as well as for emerging and industrialized economies.
And, on the one hand, much more than in any other quarter, CFOs voiced strong concerns about the impact on North America of slowing Chinese growth-concerns that dampened their corporate growth expectations in some cases. In the most recent CFO Signals™ survey, in fact, only four percent of finance chiefs viewed the Chinese economy as good compared with 23 percent in Q2 (see chart: Sinking views on China).
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