This China Unique web
page gives a good
explanation of how the conversion with the Chinese RMB works and how the RMB
is valued
Freely floating currencies on
the open market change daily in response to a endless combination of
economic, market, country, internal and worldwide forces. China (PRC, i.e.
mainland China) and Hong Kong are two exceptions. They do not allow their
currency to float. Rather, they tie it to the U.S. dollar. This means the
exchange rate versus the U.S. dollar is changed very infrequently. When it
is changed, it tends to be very significant.
The conversion rate was last changed by the government in 1994. Other
currencies will float versus the Chinese RMB in relation to their respective
change to the U.S. dollar. Note a number of countries also set their
exchange rate to the U.S. dollar and therefore will not float versus the
Chinese RMB. Among these currencies is the Hong Kong dollar.
In a free market society where currency is openly bought and sold, the local
country inflation is largely offset by the change in exchange. This is true
to the extent that there is also world wide inflation. Assuming worldwide
inflation is perhaps best represented by the rate of U.S. inflation, then
the net impact over time of inflation and exchange is the rate of U.S.
inflation.
This is a short version of Exchange rate fundamentals. It excludes
intervention of governments to control their currency or to limit a
precipitous downfall. Now here is a complicating factor: The PRC does not
allow it's currency to float on the open market. The result of this is that
the above theory may work relatively fluidly in an open market, it will not
occur in perfect lock step with the PRC.
Over time however, rates must adjust. During a period of high inflation, a
country with a fixed exchange rate will use foreign currency reserves to
hold their rate steady until those reserves are exhausted. An exchange rate
change in this instance is inevitable, it is just a matter of when. When
this occurs, the rate adjustment will be significant.
The PRC manages this constant exchange rate by the level of foreign exchange
they hold. As a result the exchange rate has remained very stable in the
past few years, despite inflation that remains in low double digits.
Things you should know about currency and exchange before you go for the
first time: Contrary to many other countries, the conversion rate is the
same (almost the same) wherever you convert your currency, whether it is a
bank, hotel or currency exchange booth. While the official rate is 8.3 RMB
to 1 USD, the actual exchange rate will receive in converting cash is
slightly lower than 8.1, so use credit cards wherever possible and you will
receive a rate nearer the official exchange rate.
Make sure you keep your receipt from the currency exchange. Because the
Renminbi is not freely floated, you can not sell back excess Renminbi
without the receipt. Upon departure at the airport, turn in you excess
Renminbi along with the receipt when you bought Renminbi. A common mistake
is to confuse the Hong Kong dollar for the Renminbi. The Hong Kong dollar
has more value, so either put them away when you arrive in country or
recognize the difference.
Here are the current rates:
One U.S. $ = 8.3 China PRC Renminbi (RMB) = 7.7 Hong Kong Dollar (HKD)
One Renminbi = 1.028 Hong Kong Dollar or, One Hong Kong Dollar = .928 RMB
CART's rumored announcement of a
TV deal in China (a story broke by AutoRacing1) with Beijing TV that will put
their viewership numbers on par with F1's TV package for 2003 has caused
speculation regarding how CART teams are planning to take advantage of the
opportunities potentially available to them in the world's fastest growing
market.
The recent press releases from Alex Yoong's camp
would suggest perhaps this is why he says he is "not losing any sleep" about
finding a CART team to drive with this year. Yoong is obviously the big winner and
a sure prize to the CART team that hopes to pry open the Chinese sponsorship
market. This is important for CART, especially with the rumors they will
race in Beijing starting in 2005.
China Currency - RMB
But not even Alex Yoong can change the fact that
China's currency, the Renminbi (RMB), is not convertible currency on the
international market. Even though China acceded to the World Trade Organization (WTO)
last year didn't mean its currency can be deposited into the local bank and
withdrawn in your favorite denomination. This fact has put the brakes on more than
one race team's hopes of finding new sources of money from China, but it's
a hurdle that can be overcome.
Apparently China's currency is not convertible because the Chinese government
fears that those around the world who practice the art of futures trading in
international currency could find some less-than-perfect economic principles at
the Chinese Ministry of Economics and Finance. If you read about the '98 Asian
Financial Crisis you will learn that it was all about currency trading and
speculating.
Or, more specifically, how futures buying in currency can drive a floating
currency down and bankrupt a country. China can't float their currency because it
might sink and cause the political system to collapse along with it.
Computerized currency trading in NY City in 1998
drove Thailand, Singapore, Russia, Korea, and Brazil to bankruptcy and Hong Kong
managed to survive only by propping up the currency with government money. At the
time, the leader of Thailand said it was the American government who did it - the
American government said poor economic principles were the culprit.
One European driver who had F1 hopes sent some his commercial team to China
recently to locate and secure some funding for his desired F1 ride. He had
contacts, credentials, and a good plan to lure a major Chinese company to sponsor
him. After the first day of negotiations the team reportedly sat in a house of
ill-repute, ordered a beer, and laughed that no one told them the currency wasn't
convertible. That made their first foray into the China sponsorship market a
little more difficult than they planned and made the trip to China much shorter
than
expected.
Most F1 teams have the advantage of a relationship with a major automotive
manufacturer who already has a big operation in China. They aren't pushing to find
a sponsor as much as they are hoping to use motorsports to assist with marketing
their non-racing products to the Chinese. Whether CART does, or does not, have the
expertise to get a piece of the China market, remains to be seen. Obviously the
big question is whether they can do it without a bevy of major automotive
manufacturers to guide their way.
Regarding CART and F1 teams getting money out of
China, here are some examples of how it can be done - Walt Disney does a lot of
business in China....sometimes they take foreign currency which China has plenty
of as they sell a lot of goods to American and they also accumulate US$ when they
sell to other countries as those countries take US$ in payment. AND sometimes they
don't mind taking RMB as they also buy merchandise manufactured in China from
companies that don't mind having payment in RMB.
The Chinese companies that have US$ are plentiful and invariably these are
companies that also need to advertise their goods, so getting the US$ to pay for
such advertisement is no problem for them, legally (applying to the China central
bank to buy US$ for such purpose) or illegally (paying the media owners or CART
teams from their off-shore accounts).
Yes, the RMB is not traded in the open market (not convertible) but neither is the
Malaysian ringgit (followed China in 1998 to avoid the Asian crash) and the Indian
rupees (since 30 years ago) and many other currencies. However, Americans and the
rest of the world are still actively trading with India and Malaysia and,
therefore, China.
CART teams can either elect to have payment in US$ or RMB if they have the need
for Chinese goods (steel, coal, food products, beer, soft toys, iron ore,
merchandise, electronic and electrical goods) and many other products widely
exported. We assume they would take the cash.
So it will be interesting to watch and see how CART takes advantage of the
opportunities, and whether hiring China's most marketable motorsports commodity,
Alex Yoong, is the key to finding a way to business over there.
But things won't stay that way for long,. "China is
opening up and they are learning the ropes as well of how the free trading world
works. At the end of the day, free enterprise helps China economically,
politically and socially." China has pledged to expand the scope of RMB
business gradually and to eliminate all geographical restrictions within five
years of entering the World Trade Organization (WTO).
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