Question

The relationship between the United States and China as market volatility threatens to make the bond between the two nations that are already tricky thanks to the imbalance in trade and investment, even more, delicate.How would a stronger yuan affect U.S. companies? What benefits would a stronger yuan have for China?

Answer 1

If yuan becomes stronger, exports from China will become more expensive. If yuan devalues then the exports fall. In this case the opposite would happen. Once exports from China become more expensive, rise in prices of domestic goods are supposed to fall (inflation reduces). This could lead to a downward pressure on wages. Such a situation would provide all the more reason for the US companies to shift base to China. They can now access cheap workforce and export their production from Chinese base to other nations.

For China this will be good news. When currency devalues, there is a high chance of entering into trade war with other developed nations as countries like US could increase tariffs on Chinese exports and make it harder for the companies to export to the western nations. With a stronger yuan, China has all the advantages because more companies will likely shift base to China and export from here. This will lead to more foreign investments, more number of jobs and a higher growth prospect.