Historically, China has not been a business-friendly region for the West. The difficulties lay across the board: Distance, language, cultural norms and perhaps most important of all, its policy of currency manipulation. Before June 2010, China regularly pegged the value of the renminbi against the U.S. dollar, according to Slate. When the nation discontinued that practice, it still kept its currency within a narrow range. Experts maintain the renminbi was held roughly 20 percent below its free-market value against the U.S. dollar.
After Chinese stocks plunged in August 2015, the government decided to devalue the renminbi by as much as 2 percent against the U.S. dollar – the largest single-day fluctuation since 2005, reported Fortune magazine. Economists were largely surprised by the move, which was in all likelihood an effort by China to stimulate its trade economy. While the move should have wide-reaching ripple effects, it could also present a unique opportunity for foreign business to flourish.
The possibility of a free-market currency
The central bank of China claimed the recent currency devaluation to be a step toward a market-friendly currency, according to Fortune magazine. Economists met that assertion with a measure of skepticism, and rightfully so – nothing in China’s recent history points toward the central bank’s willingness to accept a free-floating currency. However, if the bank does indeed adopt a more hands-off policy regarding the renminbi, that would be welcome news for foreign investment and business.
“The Chinese economy is centered around imports and exports.”
The benefits of cheaper imports
Whether or not the Chinese central bank does, indeed, relinquish some of its control over the renminbi, the most recent devaluation has one undisputable result: Import and export prices. Many economists point out that the Chinese economy is centered around imports and exports, as the nation produces cheap goods for distribution across the world. By devaluing the renminbi, China is able to lower export costs and improve the strength of that side of its economy
One perhaps unintended consequence of that policy is the way it affects foreign businesses located in China that also export goods to other parts of Asia. American- and European-based organizations with a global footprint may consider opening up shop in China as a way of more easily accessing their Eastern Hemisphere clientele and business partners. By choosing China for corporate relocation over other economies, these companies will benefit from the low cost of exports.
A more balanced economy
Finally, Chinese stability is generally a good thing for the rest of the world economy. Recently, the world’s most populous country has been anything but stable: Chinese stocks plummeted in August 2015 and have slowly begun to work their way back up. However, with more balanced, steady and quality-based growth, China could shift to a consumer-based economy, according to The Telegraph. If that were to happen, Chinese wages could increase and make offshoring a less enticing option.
Overall, Chinese stability and economic strength is generally a good thing for foreign business both within and outside of China. For organizations seeking to migrate, China is an increasingly sound option.
Tag: RMB revaluation