FIN 502 CASE 2 MANAGING EXCHANGE

Fin 502 case 2 Managing Exchange

Fin 502 case 2 Managing Exchange

1- Consider the impact of this increase in value of the Yuan on two large US companies.

(1) Yum! Brands whose 2007 second quarter profits were $214 million roughly half of which resulted from sales made by KFC and Pizza Hut within China; and

(2) Wal-Mart where the great majority of the products sold in its US stores are made in China.

Ans. With regard to the scenario and what Politicians have been suggesting about China's stranglehold on a broad range of industries. China is putting up significant barriers to foreign investment and market access and commonly taken as Chinese assault" on corporate America. More than a decade ago American fast food entered the Chinese market. Since then the number of fast food and organized chain restaurants in China has multiplied. (Jack Wills Wall Street Journal, 2003)

Chinese consumers, especially those who live in large urban areas, have accepted Western-style fast food restaurants that serve French fries and other popular dishes as a way of life. (Marc Labontae and Gail Makinen 2008)

Inspired by the success of the symbolism of McDonald's and KFC, many Chinese restaurants have tried to use traditional Chinese culture to lure customers into what is advertised as indigenous, modern fast food outlets. Recently some Chinese fast food entrepreneurs have successfully developed local versions of the Western fast food system. And despite the Yuan factor valuation the competitive situation between American fast food restaurants and local Chinese restaurants by examining service, price, management, food, and customer expectations. In addition the globalization process has experienced two types of localization in China. First, Western chains have striven to adapt to the consumers in China, by insisting on a high degree of local ownership and by modestly tailoring their products to local taste. Second, the mere presence of these Western chains has encouraged Chinese entrepreneurs to develop decidedly local versions of modern fast food enterprises which now battle directly with American brands. (Marc Labonte 2006)

If revaluation of the yuan has to wait until China is willing to undertake full capital-account liberalization, then the rest of the world has to live for too long with a misaligned yuan. Alternatively, if China is asked to free float the yuan and adopt capital-account convertibility before it puts its domestic financial sector on a firmer footing, it would be casting aside one of the main lessons of the Asian financial crisis. The lower priced goods from China may hurt U.S. industries that compete with those products, reducing their production and employment. In addition, an undervalued yuan makes U.S. exports to China more expensive, thus reducing the level of U.S. exports to China and job opportunities for U.S. workers in those sectors. However, in the long run, trade can affect only the composition of employment, not its overall level. Thus, inducing China to appreciate its currency would likely benefit some U.S. economic sectors, but would harm others. Critics of China's currency policy point to the ...