Tuesday, May 24, 2005

The Chinese Yuan and the Philippine Peso

Right now the Chinese yuan is pegged against the US dollar, i.e., in effect the yuan derives its value as compared to the value of the US dollar and not to any other currency. At this time one US dollar is worth about 8.28 yuans.

But everybody is saying that the yuan is undervalued, i.e., it should take less than 8.28 yuans to make one dollar, or it should be 4.97 yuans to a dollar (40% of 8.28 is 3.31 minus to 8.28 is 4.97).

If you are the Chinese manufacturer and/or producer and you are exporting your products, right now you are receiving 8.28 yuans for every dollar of export. If revalued, you will receive only 4.97 yuans for every dollar that you export. Thus, you will receive less for doing the same thing. You will need to add 40% to your production just to keep up. You lose 40% of your gross receipts without doing anything. And the main engine of Chinese progress is its exports

To the outsider, it does seem strange that the Chinese do not want to acknowledge that its currency is worth more as compared to the dollar. But the export angle is the reason.

But the case of the Philippines is different. For one it is not a great exporting country and secondly, it needs a lot of imports just to survive. Thus when the peso value deteriorates against the dollar, then it needs more pesos to import the same goods for the same dollar values. True, its exports get cheaper for those importing them but the Philippine exporters receive lesser amount of dollars. But worse, because the Philippines is a borrowing country, with debts denominated and payable in dollars or other foreign currencies. You will then need more pesos just to service your existing loans.

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