Currency and Low Valued Yuan
Kerimova Aysha Wal-Mart and the Yuan Debate 1. 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 Wal-Mart and would most likely passed on to customers. It could also hurt American customers whom Wal-Mart claims it saves the average household roughly $2,500 dollars every year. 2. If you were the CEO of Wal-Mart and were preparing for a meeting with the most vocal members of the US Congress on China’s currency “manipulation”, what would you say to them?
Currency and Low Valued Yuan Essay Example
I would point out that while it may be politically easy to blame China especially when it comes to an uniformed electorate, the rise in costs associated with policies aimed at encouraging China to lets its yuan to appreciate against the dollar will do harm in other ways. Average Americans (also known as voters) will feel an appreciated yuan in their wallets. China may be an easy target, but the higher costs American consumers pay due to policies pursued by members of congress is another hot topic that potential voters will respond to.
Finally increased costs means Wal-Mart will have to take actions to keep profits up to keep shareholders happy. This may mean cutting workforce which in this current economic environment where so many Americans are looking for work would not be a good thing. I would also point out that China’s yuan value against the dollar is not entirely due to simple government manipulation. 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 3. Should Wal-Mart do something about the US trade deficit with China? There is an obvious incentive for Wal-Mart to pursue actions to keep yuan value low compared to the US dollar. In the long run it may be beneficial to play an active role in reducing or at least preparing for the reduction of the US trade deficit as a result of a stronger yuan.
The United States has enjoyed being its currency being the world standard for many decades, but as other countries like China gain on the US economically there is a movement to change the US dollar’s status. Just a few months ago China and Japan announced that the two countries will begin trading currencies directly instead of using the US dollar as an intermediary Wal-Mart can prepare by hedging against currency fluctuations. If it hedges in anticipation of a yuan appreciation it can avoid the higher costs it would incur from its suppliers. Also forward contracts could be another strategy.
Wal-Mart could agree to make a future purchase at current currency rates. These strategies are relatively short term solutions. In the long term Wal-Mart will have to do several things. First it will have to find other ways to reduce costs. This may mean finding other nations that may have a comparative advantage in the production of goods compared to China. It could also promote a “buy American” marketing campaign if it is forced to return some of its goods production back to the US do to politics or the economics of the time. It can also pursue new markets.
It currently operates 3,600 stores in 15 other countries. Finally in the long run the company structure and strategy may have to be revisited. 4. Assuming that the yuan will appreciate further against the dollar, what should Wal-Mart do? There are several strategies that Wal-Mart can employ to deal with an appreciating yuan. First, is hedging against currency inflation. This can be done through forward transactions. For example Wal-Mart can agree to purchase a certain amount of a particular product in the future for the current currency exchange rate.
If the yuan appreciates against the dollar (also referred to as a Forward Discount) then Wal-Mart saved money, but if the yuan were to depreciate (also known as a Forward Premium) then Wal-Mart would lose money. (Peng, 2011) It can also engage in Strategic Hedging. That is it can spread its currency hedging activities though out a number of different countries to mitigate the risks associated with dealing with only one other country. The idea is if Wal-Mart were to lose in a currency exchange bet in one country those loses could be made up by another currency xchange gamble from another country. The company can also look into strategies that cut costs. In 2010 Wal-Mart in an effort to cut costs consolidated its store purchasing. The effort put Wal-Mart in an ever increasing position to buy directly from manufacturers. Before Wal-Mart has utilized and still does third party companies to purchase goods across the world. Wal-Mart’s intended long term goal is to become its own buyer for 80 percent of its products. It is estimated that buying directly will save Wal-Mart anywhere from $4billion to $12 billion annually.