Introduction to Corporate Finance

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INTERNATIONAL INVESTMENT

DECISIONS

17-1 Exchange rate fundamentals

17-2 Long-term investment decisions

WHICH YUAN IS GOOD FOR BUSINESS?

For many years, China controlled the value of its

currency, the yuan, by imposing strict controls on

how the yuan could be traded. On 19 June 2010,

the People’s Bank of China (PBOC) announced that

it would relax some of these controls to allow more

movement in the value of the yuan against foreign

currencies. As a result, the yuan rose against the

US dollar throughout the second half of 2010. On

average, in June of that year, one yuan was worth

about US$0.1464; but by the end of the year, the

yuan’s average monthly value had appreciated to

US$0.1501, a gain of roughly 2.5%.

Other signs that China was loosening its

grip on the yuan gradually emerged. Later in

2010, McDonald’s became the first non-financial

international corporation to sell bonds denominated

in yuan, and in January 2011, the Bank of China

opened trading in yuan to US customers through its

branches in New York and Los Angeles.

Is a rising yuan good for business? Increases

in the yuan’s value would make goods imported

from China more expensive, but would also make

US exports more attractive to Chinese consumers.

Fluctuations in the yuan could also create risk for

companies doing business in China.

In contrast, over the same time period, the

yuan depreciated against the Australian dollar,

falling from an average value of Australian $0.1716

in June 2010 to Australian $0.1514 in December

2010 – a fall of roughly 11.8%. Thus, Australian

exports became more expensive to Chinese

consumers, while Chinese imports became more

attractive to Australian consumers over this time

frame.

Sources: http://www.efinancialnews.com/story/2011-01-12/yuan-trading-us;

http://www. businessweek.com/news/2010-09-06/d06/d06/d06/deripaska-

follows-mcdonald-s-to-yuanbond-market-russia-credit.html; http://www.oanda.

com/currency/historical-rates.