The yuan exchange rate and firms - How the Chinese exchange rate can influence strategic entering into the Chinese market

Abstract

When we talk about China now, we talk about the second major economy in the world but what is more important is that China had reached this goal in less than 40 years. Chinese’s growth data are impressing: from 1978 to 1985 China tripled its income per capita. Above all, in the past China was a closed and isolated country that started to expand its international relationships, thanks to the gradual opening to foreign investments. But, even though China made progress in leaps and bounds, it’s not a Market Economy yet, and its economy can, in different ways, still affect some other great economies, such as the USA, and competitors in the world. Nevertheless, China has gained the righ to become one of the member of the WTO, and this means that its economic conditions are now something that all government have to care about. The most important issue of this thesis is without a doubt Chinese monetary policy and the value of the Chinese yuan (元), or renminbi as Chinese use to call it. As we will explain later, the value of a currency can influence the productivity, investments and trade of a country, and, as a consequence, can have influence also on a country long-term growth rate. It will be also clear how a fixed exchange rate can be more affecting than a flexible one, because a fixed exchange rate can reduce the uncertainty, even if it has more risks in terms of economic stabilization. On commercial deficit/surplus between countries literature has been arguing for a long time: at first the problem seemed to be the fixed exchange rate system under the Bretton Woods agreement, and the only solution was thought to be a flexible exchange rate system, but now the problem is maybe more extended that in the Bretton Woods period. So maybe the flexible exchange rate is not a solution to commercial imbalance. What it’s more surprising is that the Chinese yuan exchange is so low, while the country growth rate is still so high. What we want to understand is why Chinese government does not allow its currency to freely move? And why a currency devalues/revalues? Since that international economies are tied each other by commerce and capital flows, this means that a country’s economic conditions influence the currency value, in a sort of vicious circle. But there’s more: monetary policy (of course), tax of interests, the inflation rate and the public debt influence the currency values. We will explain how and how strong is the influence of this factor on Chinese RMB value. What can be more interesting is what can happen if China revalues and what if devalues. Each situation can have different consequences. The Chinese market it’s now so important for the entire economy that all countries are, in a certain way, involved in this matter, and that each of the two possibility has some bad consequences, especially for export and import in China. This analysis can be useful to give an important reflection point for European companies that want to locate their production in China. Understanding how the Chinese value can impact cross border trade is a matter of particular interests, especially for policymakers and investors. From the studied we had analyzed a money revaluation increases the possibility of an export market exit, reduce the possibility of export market survival and decrease the chance of export market entry. During a period of exchange rate appreciation, high productivity firms, are more likely to enter and survive in export market. For private-owned company, young and non-eastern firms, an exchange rate appreciation decreases the likelihood of export market entering and increase the exit. Exchange rate affects at the same time also import, both prices and import volume. How? And How an exchange rate can influence the strategic entering of a firm into the Chinese market? This is what we are trying to understand and explain.