Transcript The Asian Financial Crisis - University of Missouri

Assessing the Likelihood of RMB
Devaluation
Hung-Gay Fung
University of Missouri-St. Louis
External Factors

Asia:
• maintain export as element of business model.
• vs. U.S., Japan, Europe.

Europe:
• Euro provides opportunity for domestic growth
• uncertain opportunities for exports.

U.S.:
• slow domestic growth, other than technology,
– little domestic opportunities.
• looking external for opportunities.
China - A Key Global Force

Most important among Asian countries
• market of 1.2 billion people
• have not been subjected to the currency crisis
and is subjected to pressure

Economic growth – revised GNP growth for China 7%
– GNP growth for world = 2%
– even at half the growth rates ???

vs. Devaluation RISK
Market Potential...
Population Real GDP Growth
1997
China
91-95
Per Capita GNP
96
95
1,226
12.0%
9.6% $
620
South Korea
45
7.5%
7.1% $
9,700
T hailand
59
8.5%
6.4% $
2,740
Indonesia
209
7.8%
8.0% $
235
U.S.
267
1.9%
2.5% $
26,980
Source: Worldbank, 1997
The Impact of Crisis on
China
 More
imports from other Asian countries
• Korea: steel (32.4%), petro-chemicals (11.8%),
and textiles (9%).
 China’s
exports slow down.
 Increase unemployment.
 Slowed FDI
Economic Impact on
Chinese Exporters
• Export goods: more expensive in
comparison to Asian countries.
• Lack of liquidity in Asia - lower
demand.
• Erosion of competitiveness
– Super-competition from Asian
countries, especially Korea and
Japan
China Under
Pressure
 Under pressure
to devalue its currency.
 Risk of a Chinese RMB devaluation…?
Why RMB may not
depreciate
 Limited
effectiveness in stimulating
export (cost of RM imports, J-curve)
 Adverse impact on Long-term
growth
 Negative impact on Asian crisis,
hurts its credibility as an Asian
Leader
 Foreign debt
 Other policies options available
China’s Strategies to Stabilize
Currency
 Stimulate
domestic economy.
• National Income = C + I + G.
 Support
exports with tools other
than depreciation.
China’s Strategies to Stimulate
Domestic Economy
 Revive
shelved public projects,
especially infrastructure projects
 Build privately owned housing
projects
China’s Strategies to Enhance
Exports
 Ease
Export Credits by encouraging
banks to make loans to export-oriented
companies.
 Relax Export Licenses:
• Ministry of Foreign Trade and Economic
Cooperation issues more export licenses for base
metals.
 Increase
Tax Rebates:
• Exporters will receive full 17% value-added tax.
Regional Rebalancing


An opportunity to ease regional
growth gap (Coastal area vs. NW).
A long-term solution to national
unemployment problem.
China:
A country visited by many...
 Stable political environment
 Close to US $7 billion FDI
in 1996
 Visitors from all over the
world
 1.2 billion domestic tourists
(High income growth)
Business Strategies
 Enhance
product lines/marketing (e.g.,
conferences).
 Enhance productivity.
 Risks.
• Further devaluation, especially China
• Inaction
Competition:
 From other Asian
Countries (especially after
devaluation)
 Needs to have quality
employee to compete...
Corporate Business Strategies
- Products
 Very
high end product
 Middle market
• alliance - world, corporate and consumer
• regional rebalancing
Corporate Business Strategies
- Production
 Production
Costs
 Productivity
– modernized plants
– education of labor force