China is currently a hot market for automakers. Companies see the market as bein

Question

China is currently a hot market for automakers. Companies see the market as being one of the world’s most significant markets in the next decade and are shifting production to China. Some companies are even developing cars specifically for the local market. However, pressure on China to revalue its currency could change the nature of the market.

In June 2010, the Chinese government indicated that the Yuan would be more flexible and allowed to appreciate relative to other currencies. Please consider the strategic implications of a stronger Yuan for the auto companies.

Do any of the companies benefit from a stronger Yuan? Do consumers?

Explanation / Answer

The Chinese Yuan was frozen against US Dollar since 2008. This was a deliberate strategy adopted by China to help its manufacturers give competitive advantage in the global market. However, there was a consensus growing among other countries including the USA that China is enjoying trade advantage by adopting this unfair exchange policy of devaluating Yuan. So other countries started to pressurize China to change its exchange policy. The countries also agreed to take retaliatory action against China if China doesn't adjust its Currency. The Chinese Central Bank announced in June 2010 that it would allow Chinese Yuan to be more flexible and would gradually allow Yuan to appreciate relative to other currencies.

This decision by China has some real-world consequences. This move resulted in making Chinese exports expensive and imports to China. In other words, it made US exports to China cheaper and Chinese imports to US expensive. Consumers in China started getting earlier expensive imports at a cheaper price. Their purchasing power increased. This helped American electronic companies of US to reap profit in China. The appreciation in Chinese Yuan also resulted profitable for automobile companies in China. With stronger Yuan people could afford to buy more. So, automobile companies could earn more profit. In this way, China's decision to appreciate its currency affected consumers and auto companies.

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