Wednesday, August 10, 2005
Tweet[IWS] Watson Wyatt: CHINA's Yuan Revaluation & MULTINATIONALS [August 2005]
IWS Documented News Service
_______________________________
Institute for Workplace Studies Professor Samuel B. Bacharach
School of Industrial & Labor Relations Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor Stuart Basefsky
New York, NY 10016 Director, IWS News Bureau
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Watson Wyatt [August 2005]
Asia Pacific - China
The yuan revaluation: what does it mean for your China business?
http://www.watsonwyatt.com/news/globalnews2.asp?ID=14909&nm=Asia%20Pacific%20-%20China
After months of speculation and political wrangling, Beijing recently announced a revaluation of the yuan and an end of its decade-old peg to the U.S. dollar. Certainly, there is no shortage of commentary on this event from economists, investors and political pundits alike. But what are the practical implications for multinationals particularly U.S. multinationals operating in China?
The 2.1% revaluation on July 21 may not seem like a significant change at first glance, but even a small percentage can have a considerable impact in real dollar terms. But more important than the revaluation is the decision to shift the yuan peg away from the dollar to a basket of currencies. Although China has not relaxed its capital controls, these changes could herald the beginning of a long-term strengthening of the yuan against the U.S. dollar.
Watson Wyatt has identified the following implications for multinationals operating in China:
Measuring Results in China.
U.S. multinationals (MNCs) operating in China are already hard-pressed to turn a profit. These changes will further raise the bar for success. MNCs will need to take this into account when looking at people costs and comparing offshoring options.
Expatriate Costs in China.
The issue of expatriate pay is quite complicated, as the impact on business depends on which entity China operations or the U.S. headquarters is paying the salaries, and in which currency the salaries are denominated. Expatriates compensated on U.S. dollar packages may argue for an increase in their cost of living allowances as the purchasing power of their U.S. dollars in China will be reduced by the revaluation. Expatriates on yuan-based packages paid for by the local operation will not experience any change in their purchasing power in China, and may have a windfall when repatriating their savings back to the U.S.
Manufacturing Costs.
Importing and assembling component parts in China will become cheaper with the yuan revaluation. However, in U.S. dollar terms, the value-added in China (e.g., labor, parts procured in China) becomes more expensive, so the overall price of the export to the U.S. will likely be higher if global competition allows. The extent of the cost increases depends largely on the MNCs industry labor-intensive export industries are likely to experience higher cost increases than capital-intensive industries and whether its focus is on selling within China or exporting back to the U.S.
Second Generation Offshoring.
If the yuan continues to strengthen over time, investment decisions at the margin will be effected. The cost of building and maintaining a factory in China will increase. While a stronger yuan in itself may not spark a wholesale relocation of production capacity (assuming China can climb its way up the production value chain, as Japan and Taiwan have done), companies could rethink their industrial strategies in China. As Taiwanese companies have offshored the low-end portion of their production to China, the next step may be for companies operating in China to offshore part of their operations to less developed countries such as Vietnam and Bangladesh.
Chinese Buyers of U.S. Assets.
The yuan revaluation will become an enabler in a broader trend: the purchasing of U.S. companies by Chinese companies. As its economy develops, China will seek investments abroad. A significant yuan revaluation will lower the cost of U.S. assets and encourage the acquisition of foreign companies by Chinese entities. The addition of Chinese global companies to an already fierce and tough trading marketplace will require MNCs to compete more effectively.
August, 2005
_____________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky *
Director, IWS News Bureau *
Institute for Workplace Studies *
Cornell/ILR School *
16 E. 34th Street, 4th Floor *
New York, NY 10016 *
*
Telephone: (607) 255-2703 *
Fax: (607) 255-9641 *
E-mail: smb6@cornell.edu *
****************************************
_______________________________
Institute for Workplace Studies
School of Industrial & Labor Relations
Cornell University
16 East 34th Street, 4th floor
New York, NY 10016
________________________________________________________________________
Watson Wyatt [August 2005]
Asia Pacific - China
The yuan revaluation: what does it mean for your China business?
http://www.watsonwyatt.com/news/globalnews2.asp?ID=14909&nm=Asia%20Pacific%20-%20China
After months of speculation and political wrangling, Beijing recently announced a revaluation of the yuan and an end of its decade-old peg to the U.S. dollar. Certainly, there is no shortage of commentary on this event from economists, investors and political pundits alike. But what are the practical implications for multinationals particularly U.S. multinationals operating in China?
The 2.1% revaluation on July 21 may not seem like a significant change at first glance, but even a small percentage can have a considerable impact in real dollar terms. But more important than the revaluation is the decision to shift the yuan peg away from the dollar to a basket of currencies. Although China has not relaxed its capital controls, these changes could herald the beginning of a long-term strengthening of the yuan against the U.S. dollar.
Watson Wyatt has identified the following implications for multinationals operating in China:
Measuring Results in China.
U.S. multinationals (MNCs) operating in China are already hard-pressed to turn a profit. These changes will further raise the bar for success. MNCs will need to take this into account when looking at people costs and comparing offshoring options.
Expatriate Costs in China.
The issue of expatriate pay is quite complicated, as the impact on business depends on which entity China operations or the U.S. headquarters is paying the salaries, and in which currency the salaries are denominated. Expatriates compensated on U.S. dollar packages may argue for an increase in their cost of living allowances as the purchasing power of their U.S. dollars in China will be reduced by the revaluation. Expatriates on yuan-based packages paid for by the local operation will not experience any change in their purchasing power in China, and may have a windfall when repatriating their savings back to the U.S.
Manufacturing Costs.
Importing and assembling component parts in China will become cheaper with the yuan revaluation. However, in U.S. dollar terms, the value-added in China (e.g., labor, parts procured in China) becomes more expensive, so the overall price of the export to the U.S. will likely be higher if global competition allows. The extent of the cost increases depends largely on the MNCs industry labor-intensive export industries are likely to experience higher cost increases than capital-intensive industries and whether its focus is on selling within China or exporting back to the U.S.
Second Generation Offshoring.
If the yuan continues to strengthen over time, investment decisions at the margin will be effected. The cost of building and maintaining a factory in China will increase. While a stronger yuan in itself may not spark a wholesale relocation of production capacity (assuming China can climb its way up the production value chain, as Japan and Taiwan have done), companies could rethink their industrial strategies in China. As Taiwanese companies have offshored the low-end portion of their production to China, the next step may be for companies operating in China to offshore part of their operations to less developed countries such as Vietnam and Bangladesh.
Chinese Buyers of U.S. Assets.
The yuan revaluation will become an enabler in a broader trend: the purchasing of U.S. companies by Chinese companies. As its economy develops, China will seek investments abroad. A significant yuan revaluation will lower the cost of U.S. assets and encourage the acquisition of foreign companies by Chinese entities. The addition of Chinese global companies to an already fierce and tough trading marketplace will require MNCs to compete more effectively.
August, 2005
_____________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
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# posted by SBasefsky : 1:56 PM
