Fixed versus floating currency for Chinese Yuan/Renminbi

For the longest time, the Chinese Renminbi had been pegged strongly against the US Dollar. Currently, the Chinese Renminbi trades at 1 US Dollar = 6.83 Renminbi, or 1 Euro = 9.21 Renminbi.

There had been much talk about the appreciation of the Chinese Yuan and news had certainly been heating up. Just on 16th Apr 2010, Chines President President Hu Jintao mentioned that China is on course to gradually introduce a managed, floating exchange-rate system. This to address pressure mounted on Beijing to let the yuan strengthen and calls by both America and Euro to stem a trade deficit against the China.

Domestically, the strengthening of the Yuan will however hurt export. A stronger yuan will squeeze the already thin profit margin of most Chinese export companies and make the products more expensive and therefore less competitive. Most economist predict that a 1 percent increase in the Chinese Yuan will lead to a corresponding decrease of up to 10% in Chinese exports, especially in the sectors of agricultural products, electronics and household accessories. Thus, before any real increase in the value of the Chinese Renminbi (RMB), detailed modelling of the impact on Chinese economy is required by the Chinese government.

Finally, the yuan appreciation might force Chinese exporters to look domestically. This includes more focus on getting a larger slice of the Chinese market which is targeted for a 10.1% growth in year 2011. And such measures will also force Chinese exporters to be more competitive, which includes building a brand name rather than pure manufacturing, as well as finally more quality controls which lead to an improvement in standards for Chinese products and trademarks.

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