Essay on Wal-Mart and the Yuan Debate

1292 Words Apr 23rd, 2013 6 Pages
Activity 2.3
Case Study: Wal-Mart and the yuan debate
Why is the value of the yuan so important?
Wal-Mart’s business strategy relies on low production costs which it can pass on to its customers. If Wal-Mart were a country then it would be China’s eighth largest trading partner ahead of Russia, Australia, and Canada. Wal-Mart’s non-Chinese owned suppliers operating in China number nearly 5,000 and all of them benefit from a low valued yuan compared to the dollar. The 176 million worldwide customers of Wal-Mart also benefit from the low valued yuan. With nearly 70% of Wal-Mart’s products coming from China a sharp increase in the value of the yuan against the dollar can be devastating for the company as the increased costs for
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In fact since 2005 amid pressure from the United States the yuan has risen 23% in value against the dollar. Analysts believe that the yuan will depreciate as much as one percent this year not because of government manipulation, but because of slowed economic growth which has decreased China’s trade surpluses. (Law, 2012)
Furthermore while China does have motivation to keep the value of the yuan down there are downsides. While China has strict regulations they cannot prevent powerful Multinational Enterprises from moving their business and foreign direct investment they bring elsewhere. More importantly it is estimated that the richest one percent of Chinese households hold $2 -5 trillion in property and liquid assets. If the yuan is devalued too much these wealthy could overwhelm China’s vast foreign exchange reserve. (The Economist, 2012)
Finally given the slowing economy in Asia the International Monetary Fund (IMF) has reclassified the yuan. Previously the IMF considered it to be “substantially undervalued” compared to other currencies. The IMF has softened its tone toward the Chinese yuan and it is now considered “moderately undervalued”. This new designation makes it harder for the United States government to make a case against and therefore policies to target the imports based on the Chinese yuan. (Davis, 2012)
Should Wal-Mart do something about the US trade deficit with China?
There is an obvious incentive for

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