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Key Topics
- Requirement
- Solution
- INTRODUCTION
- PART 1: CHIMERICA RELATIONSHIP
- REASON OF CHIMERICA RELATIONSHIP DEVELOPMENT
- ADVANTAGES AND DISADVANTAGES OF CHIMERICA SYSTEM
- STEPS FOR BOTH SIDES TAKING TO END THE RELATIONSHIP
- THE FUTURE ECONOMIC PROSPECTS FOR BOTH THE COUNTRIES OVER NEXT DECADE
- A RECENT SHORT: U.S PRESIDENTIAL ELECTIONS ON THE STATUS OF CHIMERICA
- PART 2: RECENT DEVALUATION OF RMB
- CONCLUSION
- REFERENCES
Requirement
Global Financial Market Report
Solution
INTRODUCTION
This study focusses on the global financial relationship between two largest economies, such as United States of America and the People’s Republic of China. As per the scenario, the connection for markets demand to develop the attention within every developed as well as the emerging economy in the world. The increasing nature of the gigantic market share in China has described by Sir Evelyn de Rothschild as “remarkable” in the global market scenario. Moreover, this study also discuss upon the possible facts of advantages or disadvantages of devaluation of Chinese currency under the circumstances of global economic growth.
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PART 1: CHIMERICA RELATIONSHIP
REASON OF CHIMERICA RELATIONSHIP DEVELOPMENT
From the time of blooming of the millennium, America has set on the wasteful of spending binge; when fighting useless wars along with the failing of healthcare system. There are some topped it off with the devastating housing collapse. It is the time from when China has been amassing the tremendous market share for which the questions arises in case of America as the largest economic power in the world. The rise of this ne “Capitalism with Asian values” that was seemed rapidly becoming apparent in the global scenario. There are some anti-globalization supporters who have taken this change with fearful.
The reason of the job outsourcing as well as the foreign debt of America to China has the legitimate reasons as concerned. Also, it cannot be shortsighted when the dominant outlook for the pros and cons for the complex relationship has the Darwinian in the nature as there is one which strives at the loss of others. It is also without any doubt that Sino-American relationships for which it can be shared the moments for the tension present together with there are some evidences for the international trade agreements as per the counter-productive for the interest of people in America (Ferguson & Schularick, 2011).
ADVANTAGES AND DISADVANTAGES OF CHIMERICA SYSTEM
It has been noted those in early days of nineties in America; it has found that the financial system of United States has depended on the mass investments or the high rates of growth as well as the prosperity. Also, in the beginning of the decade there was the deep economic contraction has found along with the overconfidence which resulted in case of wasteful spending as well as poor allocation among the resources. In case of late 80’s in United States, there was the collapse of a quarter of savings as well as the loan associations. Those institutions have the specialization for providing insured deposits federally in case of savings account for the purpose of fund mortgages when the low interest rate becoming popular among the borrowers. Thus the collapse has offset with major panic under American market which has not been seen since the Great Depression (ChinaHush, 2009).
As the free trade leads the eventual convergence with real wages among the trade partners, China has enjoyed with enormous trade surpluses and thus the firms will demand more labor.
It is also found that the average Chinese wage is much lower than that of U.S in case of today’s scenario.
Additionally, the natural evolution of the wages and the relative prices, the current increasingly complex system for regional trade agreements which has the promotion both China as well as U.S would not distorted the market signals and it has further exacerbate competition in between U.S and also China. Many companies this fall under the victim for new regulatory barriers as well as effective ness of the ostracized on behalf of the production networks of China. Trade friction, has found to be reduced complementarity and also unprincipled competition has spell doom for Chimerica (Piatkowski, 2011).
STEPS FOR BOTH SIDES TAKING TO END THE RELATIONSHIP
In the early time of 2007, Niall Ferguson has coined the term that “Chimerica” would describe the economic relationship in between United States as well as China. As per Ferguson, Chimerica is seemed to be set up like the match made in heaven. It is thus the fact that the Chinese are interest in lending while Americans are in borrowing. It thus also found that, in together China along with US consist of 40% of the global growth from the year of 1998 to 2007 (Piatkowski, 2011).
Also, Ferguson, has decided and wrote in other articles of New York Times Editorial, that Chimerica would be serves China better than America. In this system, there would be 10:10 deal for which China will improve with 10% of growth and America with 10% of unemployment.
According to Zhang Hongliang, the economist, has wrote about the economy of China and also its financial situation since the year 2006 and thus try to spread the attention over the Chimerica system where it would be more cyclical continuation or the colonial-style for economy (Edinburgh Napier University, 2016).
He also put emphasis on the below mentioned points on behalf of the economy of China and United States:
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1. Industrialization with new pattern: It would like to be enjoyed by US for the accomplishments of the industrialization in which case China is said to bear the burden for the negative cause affected for industrialization.
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2. Thus the formation of the new pattern would like to be for the economic development. It is also found that China becomes the Global milking cow and a garage for world’s investment. In another terms, the foreign trade accounts policy would become more simpler for China with acquiring the two-thirds of the China’s GDP and also the foreign investment account along with two-third from the foreign trade.
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3. There would be more political influences acted upon for the case of integration of US as well as the Chinese policy.
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4. Cultural influence also can be found as it will increase the Americanization under the Chinese ideology as well as culture (Shaffer, 2016).
Thereby, instead of the symbolic relationship, it has been seen that there would be more realistic possibilities for growth under the situation of Chimerica.
THE FUTURE ECONOMIC PROSPECTS FOR BOTH THE COUNTRIES OVER NEXT DECADE
The dream of Hegelian unity has thus been at the core of visionary leaders throughout in history. Also, liberalism has seemed in the market with sui generis non hegemonic force which helps to melt the nations within an ecumene managed through the invisible hand of the profit optimization. Thus, Chimerica has born with the belief has enhanced through the hubris for the era with U.S hyper power as well as the end for the history mentality. Thus, the liberal global order which has ensued for the declaration through U.S presidents since 1991 for which the liberal democratic end of human civilization is found to be irreversible now as sounds utterly hubristic.
As Chimerica waits within the demise, there will be the force of real Athenian democracy will ensure that China as well as U.S will pursue another dangerous cold or the cool war which may divide the humanity into us versus them (Takeda, 2017).
A RECENT SHORT: U.S PRESIDENTIAL ELECTIONS ON THE STATUS OF CHIMERICA
As per Trump’s economic manifesto, it becomes so hazy that his attitude towards China would not be clearer any more. It has been thus instructed by the Treasury secretary of federal union, for labelling China as the currency manipulator, the president may take action against the Beijing in World Trade Organization, with the consideration of the imposing 45% of the tariff from Chinese imports within US market and that makes easier to American companies for the purpose of competition.
In this scenario, it has been noted that US is only the biggest market for the Chinese exporter where there are totaling 20% of exports are made by only China. According to the US trade policy, the result accounting for the slowdown of China’s growth and that results loss of jobs in manufacturing sector (Ulansky, 2017).
Under these circumstances, Beijing has obliges for the two choices. There is the emollient line which has the challenge to face increment in direct investment under US market as there is more supporting role from Trump who takes the attempt for rebuilding the economy in America.
Although, China has possesses the aggressive as well as nationalistic stance, Beijing has found to be without the economic weapons which is amassed under the huge stock controlled by US Treasury bonds within recent years. The proceeds for the trade and thus surplus with America within Beijing for meeting Trump’s threat for which it is dumped to the UD assets. In that case of trade war, China has to put tariffs over the exports of US and thus makes a both way competitor to each other (Elliot, 2016).
PART 2: RECENT DEVALUATION OF RMB
The devaluation over Chinese currency is noticed as the mostly talked issue among the economists from some past years. From the year, 2015, China has seen to peruse the monetary policy for their aggressive easing along with the goal for making weak the yuan over the international currencies as like the U.S dollar. It has further implications on the largest economy of the world, U.S.
As the time China has announced the policy for the currency devaluation, skeptically it has met the world with a greater concern. As per the major global economy, China has taken the decisions over the resulted uncertainty and there is a great effect on the global market as well as many economies.
There are several reasons for which China has taken the devaluation policy of its currency:
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a) Giving more power under free market: In August 11, of 2015, China has declared that they are losing the power over their own currency. In that situation, it has come up with the better settlement of the spot rate over the yuan versus other currency and also dollar mainly. In case of free market, this fact gives more flexibility over the control over yuan and thus from that time it is not remaining under the sole control of financial regulators. As per the economy maturity, China has a strong currency policy as well. It is also better to use the free market for dictating the direction of the yuan over every major currency.
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b) Increasing competitive power by increasing the exports: The main and vital reason for China for pursuing the monetary policy which will be characterized by cutting the interest rates as well as reducing the level of the reserves from banks which should hold the currency for boosting its exports. As per the major exporter China thus makes it possibilities to increase the competitive power of the currency, yuan over the U.S dollar in global market. As under the equal things the weaker currency has made possible to export more attractive as there are cheaper rate available to purchase the currency under international market. Contrary, the countries possess the stronger currency while exporting the currency; it becomes less competitive (Reuter, 2017).
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c) Investment is another significant reliance: The other reason lies for China’s devaluation of the currency, that the economy would have higher reliant in case of investment. Except the economy in U.S, it has been more reliant in case of spending more on investment under the cases of infrastructure, factories or in other assets. Furthermore, it has been found that, investment works as the biggest driver in under the economic growth of China. As per the recent report of McKinsey & Company, there is 53% of China’s GDP growth in the year 2000-2010 from the field of investment in which 27% growth is due to the private consumption. As per the report from the same company, there will be 51% of private consumption and 34% of investment will be occurred which has direct impact on the GDP growth of China in the year 2020-2030 (Inman, 2015).
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d) Effect over the global economy as well as the investors: therefore, it can be finally set up that, the policies which is employed through Chinese central bank has possessed the signal for the rest of the world to keep up the status of economy stronger than earlier. It has been announced that the actions have been taken over the currency for market as the bearish signal. With the falling of Global market,
it has been anticipated of the slowdown of the China’s economy and as it is large economy there would be the key emerging factor of the market which would have the ripple effect around the world.
It has been also observed that under certain exchange of traded funds or the ETFs, there would be the invest in China, while all kind of ETFs have been underperformed with S&P 500 after some past year:
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AlphaDEX ETF of First Trust China (FCAB): It is holding 100% of equities of Hong Kong as well as China. Among some holding funds, the companies are Evergrande Real Estate, Dongfeng Moor Corp, or the Metallurgical Corp. The worst performing fund has been found to be as low as 16% within past one year (The Market Mogul, 2017).
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GlobalX China consumer ETF or CHIQ-B: it has comprised of 99% of equities of China. This fund focusses on the discretionary sector of consumer and thus there would be the optimal play in case of booming Chinese middle class. Some of the top holdings are Ctrip.com, International or the Alibaba Group as well as JD.com (Shaffer, 2016).
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iShares China or Large-Cap (FXI A):- It also comprises 99% of the equities of China. The appeals through ETF, that there would be more risk-averse investors as there are more holding companies for the large –cap equities like the companies which will hold the market capitalization over $10 billion. There is relative stability which will help FXI over the past few years. Also, there is still underperformed of S&P 500, the fund has been returned with 8% under 12 months of period (Ciura, 2016).
CONCLUSION
So, from the above discussion, it has been found that the reasons working after the monetary policy of China in case of weakening yuan against the other international currencies are found to be threefold. At the first case, it provides the free market with a better opportunity for dictating the currency movements. As per the second case, it has been known that, china can exports more and more competitive market over the global scale. And at the last not the least, there is the Chinese economy, which is heavily reliance over the investments, like mostly for infrastructure. The case of devaluation of the currency, like yuan, there has the significant implication not only in case of Chinese economy but, the case of global economy as well.
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ChinaHush, 2009. The disaster of “Chimerica” – Can both sides be losers?. [Online]
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Available at: http://www.chinahush.com/2009/12/14/the-disaster-of-chimerica-can-both-sides-be-losers/
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[Accessed 21 03 2018].
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Ciura, B., 2016. Reasons for Yuan Devaluation. [Online]
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Available at: http://etfdb.com/yuan-devaluation/reasons-for-yuan-devaluation/
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[Accessed 21 03 2018].
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Edinburgh Napier University, 2016. Chimerica. The relationship between China and America. [Online]
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Available at: https://www.grin.com/document/358858
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[Accessed 21 03 2018].
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Elliot, L., 2016. How America's new president will affect the global economy. [Online]
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[Accessed 21 03 2018].
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Ferguson, N. & Schularick, M., 2011. The End of "Chimerica". International Finance , 14(1), pp. 1-26.
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Inman, P., 2015. Why has China devalued its currency and what impact will it have?. [Online]
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Available at: https://www.theguardian.com/business/2015/aug/11/china-devalues-yuan-against-us-dollar-explainer
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[Accessed 21 03 2018].
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Piatkowski, M., 2011. The Inexorable Rise of "Chimerica". International Finance, 14(1), pp. 1-26.
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Reuter, 2017. China's economy could grow 6.5 percent in 2017; devaluation could stabilize yuan: think tank. [Online]
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Available at: https://www.reuters.com/article/us-china-economy-thinktank/chinas-economy-could-grow-6-5-percent-in-2017-devaluation-could-stabilize-yuan-think-tank-idUSKBN14N03G
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Shaffer, L., 2016. 365 days later: China’s yuan falls without the horror show. [Online]
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Available at: https://www.cnbc.com/2016/08/10/china-economy-news-one-year-after-yuan-devaluation-renminbi-poised-to-fall-further.html
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Takeda, K., 2017. A Tale of Two Twists: Is China Currency Manipulator?. International Finance, 50(2), pp. 2-17.
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Ulansky, E., 2017. US Elections - Impact on India, China and Russia. [Online]
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