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Issue Date: Vol. 45, No. 8, August 2005, Posted On: 9/7/2005

New Chinese Currency Policies Likely To Translate Into More Expensive Products For U.S. Bulk Vending Channel

Hank Schlesinger

- In a move that was long expected, and one that was the subject of political pressure from U.S. lawmakers, the Chinese government on July 21 revalued its currency in what economists are calling a "managed float." The new policy will, in effect, increase the value of the Chinese currency, called the yuan, in relation to the U.S. dollar. Or in other words, goods imported from China will become more expensive.

China's currency had been set against the dollar at approximately 8.28 since 1998. Since instituting the "managed float," the yuan has been trading at 8.11. The rise increased the value of the yuan about one-quarter of one U.S. cent. According to The People's Bank of China, the country's central bank, the value of the yuan will be set by a "basket of currencies," including the U.S. dollar.

Although U.S. manufacturers who compete against Chinese imports welcomed the news, importers of Chinese goods were not pleased by the new policy announcement. For those in the bulk vending industry who rely on inexpensive products imported from China, the move may signal significant cost increases in the future. If the recent policy shift is, as many economists theorize, an interim step in letting the yuan fluctuate according to market value, then the cost of bulk merchandise could rise sharply. At present time many estimate the yuan to be undervalued by as much as 40%.

"I welcome China's announcement today that it is adopting a more flexible exchange rate regime," said U.S. Treasury secretary John Snow. "As we have said, reform of China's currency regime is important for China and the international financial system. I particularly noted China's objective of allowing the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange regime based on market supply and demand."

Although a higher-value yuan would serve to remedy the trade imbalance between the U.S. and China, both operators and manufacturers could be hard hit if the yuan is allowed to float. While overseas factories and U.S. suppliers may be able to absorb some of the extra costs, any significant rise in the yuan's value would necessarily have to be passed on to operators who have already seen their overhead costs rising in recent years.

"I know of very, very few operators who are prepared to raise prices to the consumer in any significant way," said one vending veteran. "And if the price of goods rises 15% or 20%, it could be devastating to the industry."

As for the Chinese central bankers, they are giving precious few clues as to their future plans regarding the yuan. "The People's Bank of China will adjust the band of the exchange rate when appropriate, based on the maturation of the market and economic and financial circumstances," the bankers said in a statement.

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