Abstract
The recent activity of PBOC (People’s Bank of China), the devaluation of Yuan with respect to dollar, is often seen as one of their strategic measures to boost the poorly performing export industry of China. Many international exporters from outside of China have been severely hit by this move as the costs of Chinese products declined tremendously. This incident is proves that international markets are always clouded by numerous risk factors such as the one mentioned above. But that should not be deterrent for businesses trying to venture into international trades. In most of these cases, speculative business venturing is the main reason why many investors suffered loss during Yuan devaluation. Decisions taken strategically can be used to overcome such risks associated with international trades. And therefore, this paper is an attempt to discover the difference between been risk avoidance and risk management and strategically analyze Yuan devaluation from a variety of vantage points to finally make a corporate decision specifically for Walmart and U.S.A.
Strategic Conversations on International Market Risks
The international market has seen its ups and downs after the advent of the phenomenon of globalization. No country or domestic market is isolated from the effects of any international economic event in this age and time. This can be explained well with the example of the global economic recession of 2008. In the era of globalization, when people and potential markets are no longer constrained by political boundaries, it is impossible for any country to limit its trade connections with others. And therefore, there is no way a country can shield global economic trends from its own domestic market. Even if a country wishes to do so, it is just compromising its economic growth rate and not doing anything particularly good for anyone. So if international economic transitions and risks thereof can affect domestic economic stability as well, there is only a thin line between the difference of swimming in domestic market (and limiting organizational achievements) and wading in international market (and boosting growth). This can be further explained by analyzing some of the current international economic trends such as the devaluation of Yuan and its effects on global economy.
Walmart and Yuan Devaluation
Walmart is considered to be one of the world’s largest companies by revenue. Spread across a wide range of countries and continents, Walmart is the best example of an enterprise whose financial aspects would be a direct reflection of global financial trends. And therefore, it is the task of its CEO to strategically analyze and adapt the financial aspects of Walmart according to the current global economic trends.
The news that recently rattled international markets was the abrupt devaluation of Yuan with respect to dollar. This stealthy move made by the People’s Bank of China could either be an attempt to boost its staggering economy or be one of its first regulatory actions to turn the Chinese economy into a market economy. The Walmart subsidiary operational units in China are not expected to profit in this move since most of its suppliers are from China itself. The Yuan devaluation can, to some extent, increase the purchasing power of the people of China due to increased trade surplus. But still such profits, if any, shall be lost during its transition from China to Arkansas, U.S.A. due to the conversion from Yuan to Dollars. But for Walmart subsidiaries in international markets, the Yuan devaluation can be a source of profit if its suppliers are willing to share their increased export profits with the retail chains. As most of the suppliers, even in the international markets, are from China; it wouldn’t be going too far to request them to share their increased profit with Walmart. One prudent move in this front would be to ask the suppliers from China to cut the costs of their supplies as it wouldn’t affect their yearly turnover much. And considering the insignificance of such price cuts for the Chinese suppliers, they are highly likely to oblige.
Yuan Devaluation and international market
Yuan devaluation has had its reciprocations all over international markets. Many countries reported a major crash of their stock markets after the Chinese announced their surprise devaluation plan. It is globally believed that such artificial devaluations can only have adverse affects on global economy . A fear of another global recession is clouding the international markets due to this belief. In the U.S., economists are afraid of having other Asian countries following this path by devaluating their currencies to compete with the Chinese in exports . If such a trend follows the Yuan devaluation, there would be a steep fall in our export sector.
So as long as the value of Yuan is kept very low compared to the U.S. dollar, its trade deficits with China will increase further. The growth of the country’s trade deficit (with China) is currently at an all time high. And if other Asian countries join hands to fight their trade deficits with China, the U.S. will be forced to make policies to boost exports by undermining the value of dollar. Such actions can have immense reciprocations for investors who use dollar as their trading tool. So it is suffice to say that international markets are prone to a lot of market risks. But the truth is that no country, whose domestic market is not self sustaining, can shield itself from such global trends. So refraining from international trading is not a viable solution to avoid the risks associated with it. The best way is to persistently analyze market trends before making a decision. Keeping it safe is not always synonymous with business growth. And for this particular reason, it is imperative that we analyze this issue further and make the best possible conclusion from it.
The Chinese currency manipulation is commonly seen as a means to boost its slow growth rate that was reported in the last few quarters. But after careful consideration of other financial actions undertaken by the Chinese, such as their attempts to have Yuan included in the IMF’s SDR basket of reserve currencies, the actual reason for the devaluation of Yuan seems to be pointing in another direction. And to further support this claim, PBOC has attributed their actions to the Chinese President Xi Jinping’s attempts to transform Chinese fixed economy to a market economy .
The IMF has always complained about the under and overvaluation of Chinese currency and therefore decided against adopting Yuan into its reserve currency basket. And therefore, the actions by PDOC are an attempt to have the Yuan accepted as a primary trading tool amongst the heavyweights such as the dollar, pound, yen, and euro. So instead of fighting for policies to undermine the value of dollar and rectify the short term trade deficit, our focus should be to make the value of dollar stronger and firm against other currencies. If Yuan joins the other prominent trading tools (such as the Euro, Yen, and Pound) the demand for dollar will be reduced considerably in international markets. It is expected that Yuan would make up to almost 10% of IMF’s reserve basket in the future (by 2030) if it gets accepted as a reserve currency for investors (IMF accepted Yuan recently).
But according to a majority of economists, this Yuan insurgency into the global market is not yet any near to being a reality. It is highly likely that dollar shall remain as the most favorite trading tool among investors for many more years. This is because of the unstable policies taken by the PBOC regarding Yuan. IMF has recently approved Yuan’s request to be a part of its reserve currencies. This can only further raise the uncertainties surrounding Yuan. The fixed rate nature of Yuan cannot persist as long it is a part of IMF reserve basket of currencies. But China still has to go through a series of changes before its economy can be fully converted to a market economy. And many investors, who were highly hopeful of the stability of Yuan, were hit severely due to the multiple devaluations of Yuan . Therefore, exporters treading in international markets shall keep their belief in the power of Dollar over Yuan for many more years to come. So it is highly likely that exporters from many countries (including Argentina, South Korea, Indonesia, or Malaysia) selling to China would still have their trade done in dollars instead of Yuan.
References
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