What is currency revaluation?

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What is a currency revaluation? --------------------------------------------------------------------------------



NEW DELHI/MUMBAI, India, Jul 22, 2005 (The Economic Times - Knight Ridder/Tribune Business News via COMTEX) -- On Thursday, China announced a revaluation of its currency, marking a 2.1 percent appreciation of the yuan which had been pegged to the US dollar at 8.28. So what really is revaluation of a currency? Why do countries engage in such an exercise? A country's exchange rate system can either be fixed or based on a floating rate system where demand and supply factors drive the value of the currency up or down.

In a fixed exchange rate system, the value of a country's currency is fixed relative to a hard currency, say the dollar. This system was in vogue in the '40s and '50s, following the Bretton Woods conference when it was decided to put in place this system to ensure a stable global economic scenario. Later, in the early '70s, developed countries shifted to a floating rate system.

When countries revalue their currency -- that is effect an upward change in the currency's value -- there are implications on both the capital and the current account. On the current account, imports become cheaper (where revaluation has been undertaken) and exports become more expensive. Cheaper imports will lower the cost of imported raw materials, and overtime, even wages, which would allow exports to be priced lower.

To what extent this happens depends on factors ranging from the import intensity of exports and productivity changes effected by the exporter. The effect on the capital account is for speculative investments to immediately unwind in the revaluing currency. Dollars could flow from China to the yen, and other emerging Asian markets, strengthening their currencies.

The longer-term anti-inflationary impact of a revaluation (via cheaper imports) make for lower interest rates. From a monetary point of view, this would induce an outflow of resources from China to those currencies whose interest rate differential vis-a-vis Chinese rates has gone up.

Lower interest rates could spur investment and attract more FDI, attracting inflows and reinforcing the currency's tendency to harden. In the case of China, it has been under pressure especially from the US to revalue, given the huge trade deficit of $162bn, which the US runs with Beijing. Yuan appreciation will mean that Chinese firms could lose their competitive edge and may have to brace for lower margins.

This is because the currency will be more expensive. India has had experience with the fixed rate. The rupee was pegged to the pound until the early '70s. In the mid-'70s after the first of the oil shocks, the rupee was pegged to a basket of currencies.

In '92-93, the country moved to a new system christened the liberalised exchange rate management system. Under this, 40 percent of the receipts or remittances of exporters were convertible at a fixed rate while the rest was convertible at the market rate. This dual exchange rate system was then given up and the country moved to fully managed float by '94.

 

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Change in Chinese monetary policy will affect U.S. businesses

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Jul 22, 2005 (The Philadelphia Inquirer - Knight Ridder/Tribune Business News via COMTEX) -- Facing mounting economic tensions with the United States, the Chinese government said yesterday that it would loosen its currency's link to the U.S. dollar, a move that could give American manufacturers some relief in competing with low-wage Chinese factories but also could push U.S. consumer prices higher.
U.S. companies and politicians have complained that the Chinese government deliberately kept the value of its currency, the yuan, low in relation to the U.S. dollar so it could more easily export goods into the lucrative U.S. market.

American manufacturers have shed more than three million jobs in the last five years, in part because of increased productivity and their struggle to recover from the recession, but also because of intensifying competition from abroad. U.S. imports of Chinese goods have more than doubled since 1999 to nearly $197 billion in 2004.

A stronger yuan, however, also might boost the prices of many Chinese-made consumer items, including clothes, shoes and televisions, that American shoppers have come to expect at cheap prices at Wal-Mart, Target and other retailers.

While the change was not the full-fledged freeing of the yuan that some in the U.S. government want, Federal Reserve Chairman Alan Greenspan called the announcement a "good start."

Under the Chinese government's new policy, the value of the yuan will fluctuate within a narrow trading range against a basket of foreign currencies. China set its currency's value at 8.11 yuan per dollar, from the previous 8.277 yuan per dollar -- making the yuan immediately 2 percent more valuable than it had been before.

U.S. Treasury Secretary John Snow said he welcomed China's move, saying he "particularly noted China's objective of allowing the market to fully play its role."

"The international economy performs best with free trade, the free flow of capital, and flexible currencies," Snow said.

Most U.S. retailers have been preparing for the currency change, and many said they were not expecting to raise prices to offset any higher costs that might result.

"Prices in our stores are not changing any time soon. The adjustment announced today is small and has been expected for some time," said Mia Masten, spokeswoman for Bentonville, Ark.-based Wal-Mart Stores Inc., the world's largest retailer. "It is our sense that our suppliers have been anticipating this change and preparing for it."

Wal-Mart estimated that it imported $18 billion in goods from China last year, up from $10 billion in 2001, making the company China's seventh-largest trading partner.

Philadelphia-based Urban Outfitters Inc. said it decided last year not to increase its imports from China because of the uncertainty about the currency. The teen and women's retailer imports about 10 percent of its merchandise from China.

Chief financial officer John Kyees said Urban Outfitters would not increase prices because of the currency change. The company would buy more from other countries if products from China become too expensive.

"We buy in U.S. currency only," Kyees said. "If they [China] come back later, saying they need more U.S. dollars, our position would be, 'That's fine, and we can source in other places.' You bite the bullet or switch vendors."

Urban Outfitters buys products from many countries, including Sri Lanka, India, Cambodia and Indonesia.

David's Bridal, the Conshohocken bridal-wear and accessories retailer, buys products from China but said it was too early to know whether the currency change would affect its prices.

"It's a rather modest shift," said spokeswoman Cindi Freeburn.

The National Association of Manufacturers praised the yuan revaluation but said the Chinese government appeared to be moving too cautiously.

"Today's announcement by the Chinese authorities has the potential for beginning to correct the huge trade imbalances that have been created by distorted currencies," said association president John Engler.

Raj L. Gupta, chairman and chief executive officer at Rohm & Haas Co., said he did not believe the yuan revaluation would be a significant factor for the Philadelphia chemical company.

Most of the products Rohm & Haas manufactures in China are sold to other companies in China and not shipped to the United States, Gupta said in a conference call with analysts.

Jay Bryson, global economist with Wachovia Corp., said the revaluation could strengthen the yuan against the dollar by about 10 percent in the next year.

"This will not cause the trade deficit to go away," he said. "But everything else being equal, it dampens protectionist sentiment in Washington."

Bryson warned that the yuan revaluation could lead the Chinese government to buy fewer U.S. Treasury securities, which in turn could push interest rates higher.

Harry Haber, president and owner of Ginsey Industries Inc., a Camden County manufacturer of decorative toilet seats sold at Wal-Mart, Bed Bath & Beyond, and other stores, estimated it would take a 10 percent increase in the value of the yuan before retailers raise prices.

"My guess is that it will eventually translate into higher" retail prices, said Haber, whose company imports half the goods it sells, about three-quarters of the imports coming from China.

In the short term, Haber said, any change in the value of the yuan is likely to "impact distributors like myself who are going to have to absorb these costs for a while until the retailers are willing to participate."

Ultimately, winners in the process are likely to be U.S. businesses that will find a larger market for their goods in China, and the losers will be U.S. consumers who could face those higher prices and mortgage rates, said Mark Zandi, chief economist with Economy.com. "The move is small, but it's the start of a very significant process," Zandi said.

By Wendy Tanaka and Bob Fernandez. Inquirer staff writer Harold Brubaker and the Associated Press contributed to this article.

To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go
to http://www.philly.com.

 

[Page]

Just in Short..
Currency revaluation is a deliberate upward adjustment in the official exchange rate established, or pegged, by government against a specified standard, such as another currency or gold.

 

[BentRod]

Page.....You are obviously bumping 4 YEAR old posts on purpose. What is your motive????

 

[Trembling Hand]

Page.....You are obviously bumping 4 YEAR old posts on purpose. What is your motive????

Yes very strange Some times his sentence structure is so bad it makes no sense then you get post like the above which are either cut and pastes from somewhere else or a completely different person?

 

[Stormin_Norman]

Just in Short..
Currency revaluation is a deliberate upward adjustment in the official exchange rate established, or pegged, by government against a specified standard, such as another currency or gold.

should let the bank of japan know theyre doing it all wrong.