Impact of the Chinese currency on economy

Discussion in 'GBAtemp & Scene News' started by Costello, Sep 21, 2010.

  1. Costello

    Costello Headmaster

    Oct 24, 2002
    If you have been following the news recently, even remotely, you probably know that the Yuan (or RMB, Chinese currency) is undergoing a strong revaluation. Wow, ground breaking news eh? What does this have to do with anything? Why is this being posted on GBAtemp of all places? I think it's time for a very basic lesson of economy.

    To put it simply, China produces a lot of stuff. From clothes to electronics, from watches to cigarettes, from shoes to... flashcarts. It is no secret that most-- if not all flashcart teams are located in China: R4, Supercard, Acekard, and so on. But how does a flashcart go all the way from the factory down to the bottom of your Nintendo DS cartridge slot?

    Well, there's obviously a middle-man: the resellers. The best example would be ShopTemp, GBAtemp's partner shop. They purchase goods (in bulk orders, rarely less than 100pcs at a time!) from factories in various places of China, and sell them online to customers all around the world. And that's where trouble comes in.

    Resellers like ShopTemp and all other shops that sell products manufactured in China have to purchase stock with the local currency: the Yuan. Local factories aren't interested in foreign currencies, they need to pay for the material and salaries with the local currency. On the other hand, since retailers sell those products to people worldwide, they don't get paid in Yuan but in US Dollars. You pay $35 for the Supercard DSTWO no matter what the currency exchange rates are, that is none of your concern.

    To summarize: 100% of retailers income is in USD, and 100% of their expenses are in CNY (Chinese Yuan). Consequently retailers have to convert money from USD to CNY in order to be able to purchase stock and shipment services, to pay for salaries and warehouse costs.
    Now what happens in the Yuan is revaluated? What happens if the local currency gets stronger? Let's do some basic math using virtual figures.
    - Monthly income: $10,000 (USD).
    - Monthly expenses: ¥60,000 (CNY).

    The exchange rate used to be nearly 7 CNY for 1 USD. The Yuan was very weak at the time, with 1 dollar you could get as much as 7 Yuan, with which you can get 3 or 4 cans of Coca-cola over here in China. This implied that there was enough income to cover expenses: 70,000 CNY (10,000 USD converted to CNY). But since the revaluation, the US dollar has dropped down to 6.69 CNY for 1 USD. Income has consequently dropped down to 66,900 CNY.

    This revaluation is extremely sudden, the Yuan has been getting stronger and stronger over the past few days. The dollar is losing almost 0.01 point every day. Which means at this rate in 10 days, 1 USD will be worth 6.59 RMB. In 100 days, 1 dollar will be worth 5.69 RMB. In this scenario, converting your income of 10,000 USD into the Chinese currency won't be enough to cover your expenses: 56,900 CNY while you need 60,000.

    What happens in that case? There will be two major effects.

    The first and most direct consequence is that retailers that rely on Chinese production will have no other choice than to increase their prices if they don't want to go bankrupt. Prices will most defintely be increasing from now on. Even retailers like DealExtreme who have been selling products at a very competitive price with extremely low profit margin will have no other choice than to see their prices rising. It won't be a massive increase, but we're talking about a few dollars per product.

    The second and indirect effect could be positive for the economies of Western countries. Instead of importing goods from China, which is a practice that will become more and more expensive due to not just the CNY revaluation but also because of the price of oil/petrol, companies and businesses will tend to prefer purchasing goods in their own country. Local production could be redynamized and unemployment rates should fall.

    That's all there is to say at the moment, if the Chinese Yuan keeps getting stronger we will soon be seeing prices rising on many shops. There is more than meets the eye: this is just a very basic and partial explanation of select consequences, if you are interested in the subject I encourage you to read newspaper articles about it, and to inform yourself. Economy is a vast subject.
  2. CrimzonEyed

    CrimzonEyed GBAtemp Addict

    Sep 3, 2007
    So Shoptemp will most likely raise their prices after a while?
  3. Youkai

    Youkai Demon

    Jul 1, 2004
    Germany , NRW

    Well yes i can see that many things might get more expensive BUT I really do not believe that this will help us in anyways.
    I know someone who works as some sort of Manager helping Companys to get a branch running in China and he still has more than enough to do.
    and as long as its not close to 1:1 I believe enough people still see their benefit from even a single cent they get more.

    and as you might know the Euro became rather fast stronger than the Dolla and still our economy is rising (slighty but it is) so it does not only depend on the prices (even thaught it does pretty much do so)
    as long as the exchange rates are not getting close to 1:1 i don't see any big difference except the higher prices for us poor little users.
  4. Costello

    Costello Headmaster

    Oct 24, 2002
    ^ the constant progress of the currency is obviously a condition for that happening
    if the currency stabilizes at like 1 USD for 6.5 CNY its still worth it.
    but it doesn't look like its gonna stop here. The USA are trying their best to get China to revaluate their currency
  5. FAST6191

    FAST6191 Techromancer

    pip Reporter
    Nov 21, 2005
    United Kingdom
    Hmm I have stocks of most of the big currencies around the world, looks like I will have to pay even more attention to China.

    On the other hand I have seen countries use the currency of another (free trade zones, oil used to be always priced in dollars, many big companies in the UK accepting Euros, many ports/border towns around the world (or at least a few things close to them) allowing different currencies), I wonder if an equivalent will happen here.
  6. damaztur

    damaztur Member

    Jun 10, 2009
    Nice comparison with the Euro. But as you all know, it was around 1.6€ for 1US$. Now, on the other hand it is 1.3€ for 1$
    What I want to say is, it might look bad in the beginning. But eventually it will drop back. Mostly, because China is a country of export. When there products get more expensive, people will get their products from elsewhere. I'm not talking about flashcarts. I'm talking about all the other stuff that is being produced somewhere else. It just takes sometime for it to get to a normal rate..

    Please correct me if I'm wrong. I'm typing this with the information about what i know from economics and stuff
  7. FAST6191

    FAST6191 Techromancer

    pip Reporter
    Nov 21, 2005
    United Kingdom
    It might drop back but you also have India to think about by most measures of progress and other factors they are very similar to China- similar manufacturing onus/focus on exports, similar education and focus of it, similar labour laws/standard of living, similar IP laws and/or enforcement of them for that matter, similar focus on English language (it is the language of business, science and the like after all) and a fairly similar economy (post world war 2 China and India got/declared independence/revolution about the same time and have been neck and neck ever since).
  8. Wabsta

    Wabsta you fight like a dairy farmer

    Apr 25, 2008
    SCUMM Bar
    Hmm pretty interesting to read, thanks for letting us (the temp) know!
  9. Reploid

    Reploid GBAtemp Maniac

    Jan 20, 2010
    Serbia, Republic of
    Thanks for the job to writer but...
    I only started to shop on and thats that.
  10. JohnLoco

    JohnLoco GBAtemp Regular

    Mar 20, 2010
    Hope the workers get some income aswell, the Chinese has been opressed for too long.
  11. Costello

    Costello Headmaster

    Oct 24, 2002
    I am going to go on a trip to Shenzhen in the next month or two (thats where all the flashcarts and shops are) and wanted to make a short documentary about flashcart factories and stuff, but I was told that they will never let me in.
    Apparently flashcart production is very secretive! It's a shame I would have loved to get some sort of insight on how things work over there. [​IMG]
  12. FAST6191

    FAST6191 Techromancer

    pip Reporter
    Nov 21, 2005
    United Kingdom
    It will not be flash carts but electronics are electronics really and there was a nice eevblog episode covering it all

    Also have a poke around (same guy who hacked the original xbox) as he has a bunch of the smaller run stuff in China.

    Obviously not the same scale of things but there are similar electronics factories dotted around the world that use all the same machines (pick and place, testing, scanning/inspection, surface mount, wave soldering and the like) that you can probably find shots of more easily.
    On the other side of things if you can find it then the phone repair places will probably mirror the flash cards quite nicely.
  13. shakirmoledina

    shakirmoledina Legend

    Oct 23, 2004
    Dar es Salaam
    keep trying costello.. it would be interesting
    i guess a few dollars wouldnt be so problematic, and also it would seem this is kinda bad for china but i guess it wouldnt be far fetched to say tht the dollar exchange MIGHT get replaced
  14. Slyakin

    Slyakin See ya suckers

    Oct 15, 2008
    United States
    Soviet Slyakin
    Damn, now America is gonna collapse into a 3rd world country, famine and pollution will destroy the world, and I'll be left with Chinese people!


    Not meaning to be racist, though. [​IMG]
  15. Rydian

    Rydian Resident Furvert™

    Feb 4, 2010
    United States
    Cave Entrance, Watching Cyan Write Letters
    Gah, that would have been epic.
  16. basf11214

    basf11214 Member

    Oct 4, 2007
    United States
    Appreciating RMB would drive up inflation, at a time when interest rates in most western/industrialized/developed nations are near zero (look up stagflation). The consequence would be that most consumers would see their (real) disposable income fall. At the same time, the degree to which western manufacturing would be revitalized by appreciation in Chinese currency is highly suspect. The number of low wage, cheap currency countries in China's vicinity is quite high. Manufacturing would simply move to those places. At the same time, the manufacturing that currently takes place in China are, for the most part, low margin, low skill, low value-added, and low wage businesses (i.e. assembling, rather than producing, electronics). So long as (great enough) wage disparities exist in the world, I doubt those jobs would ever move back to the States without some sort of artificial (aka legislative) trade barriers. Certainly, the trade deficits with China would fall, but those falls are likely to be replaced by rises in trade deficits with other nations. Consumers would continue to demand those same goods, which are no longer (and quite possibly never will be) produced in the States. Thus, imports overall should see little change in the long term. The United States should concentrate on exporting more of what it does make--semiconductors, weapons, software, (financial meltdowns, demand for narcotics, subsidized farm products, low yield sovereign debt, ... ,) etc. that have high value-added and high margins rather than start rounds of beggar-thy-neighbor currency complaints.
  17. TheCrystalBook

    TheCrystalBook Newbie

    Sep 21, 2010
    Hoping that too, they're not getting paid enough.

    Oh well... what can we do huh? [​IMG]
    Good read though....
  18. Depravo


    Global Moderator
    GBAtemp Patron
    Depravo is a Patron of GBAtemp and is helping us stay independent!

    Our Patreon
    Oct 13, 2008
    We can boycott Chinese merchandise until the exchange rate is back to how The West™ prefer it?
  19. monkat

    monkat I'd like to see you TRY to ban me. (Should I try?.

    May 21, 2009
    United States
    Yeaaaahh! Only the Western world is allowed to be in a comfortable situation!

    You can see how much good for the planet we've done with it! We're so responsible, those godless heathens would kill us all.
  20. Gh0sti

    Gh0sti iOS Guru

    Aug 19, 2009
    United States
    Inside you, all around you
    i want my USD stronger, stupid china becoming another USA, however the only way they can be better is if they change working conditions and add minimum wage for workers, which i find sad that they are still exploiting their workers and their economy is growing

    also base off your #'s there costello, you just have a theory, doesnt mean the rate is going to increase like that, and all of the sudden we could have another slump in the economy, so as of now yes we shall see an increase in products however, not to big of a deal,

    and eventually America will pull out of this recession and #'s will change in favor for americans again