Final report subject international financial management

SUMMARY This report analyzes the implications of the IMF’s global economic forecast of slow growth 3.2% in 2024 and 3.3% in 2025, persistent inflation driven by services prices, and risi

VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY

INTERNATIONAL UNIVERSITY

School of Business Administration

FINAL REPORT

Subject: International Financial Management Lecturer: Ms Vu Thuy Mai Uyen

4 | Vii Hao Nhién BAFNIU20231

5 | Tiêu Ha My BABAIU21459

TABLE OF CONTENTS

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5.1 Political stability

6 Strategic Responses to the IMF Outlook

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Conclusion

SUMMARY

This report analyzes the implications of the IMF’s global economic forecast of slow growth (3.2% in 2024 and 3.3% in 2025), persistent inflation driven by services prices, and rising trade tensions for the company, which has significant exposure to contracts in Yuan China’s GDP is expected to grow 5% in 2024 due to strong domestic consumption and a temporary surge in exports However, challenges like supply chain disruptions, rising wages, and uncertain export recovery remain critical The company’s operations in China, particularly the exposure to the Yuan, require careful assessment of how economic conditions may impact exchange rates and the financial stability of the company The forecasted growth in China presents opportunities, but it also raises risks related to currency fluctuations, inflation, and trade disruptions

The analysis highlights that Asia, led by China, is expected to drive global trade recovery, with regional trade growth forecasted at 3.25% annually during 2024-2025, China’s currency and capital controls are also evaluated, revealing their influence on Yuan stability and international parity conditions The company’s exposure to capital flow restrictions in China needs to be considered, as these capital controls could affect the movement of capital and profits across borders This will be crucial for managing liquidity and ensuring that the company can continue to operate smoothly, especially in light of potential disruptions due to trade tensions and inflationary pressures

To address these challenges, the report proposes short-term strategies such as optimizing hedging practices to manage exchange rate volatility and mitigating inflation risks Given the IMF’s forecast of rising inflation and interest rates, the company should consider using financial instruments like forward contracts or options to hedge against potential losses from currency fluctuations in Yuan contracts Long-term actions include diversifying financial

exposure, restructuring contracts to reduce financial vulnerabilities, and enhancing supply chains to capitalize on opportunities in China’s robust domestic market The company should also explore diversifying its operations to other regions, reducing reliance on the Yuan, and restructuring contracts to reflect the risk of currency fluctuations

These measures aim to protect income margins, safeguard shareholder value, and ensure resilience against global economic uncertainties As global trade faces challenges and inflationary pressures rise, it is critical for the company to remain agile, adjusting its strategies to maintain competitive advantage while safeguarding profitability The IMF’s outlook underscores the importance of carefully monitoring global economic conditions, managing capital flows, and adapting to shifting currency dynamics

1 Introduction

The renminbi exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies The Chinese government has announced that it will gradually increase the flexibility of the exchange rate

Market Stability: This system minimizes volatility by balancing market demand with controlled adjustments, enhancing predictability for traders and investors

Economic Adaptability: Gradual flexibility allows the currency to respond to external shocks while maintaining domestic stability

Global Role of RMB: A flexible yet managed rate supports the RMB's internationalization, promoting its use in trade and finance

2 The Currency System of China

China has adopted a managed floating exchange rate system, whereby the People's Bank of China takes significant responsibility for adjusting the renminbi exchange rate At the end of

2022, the exchange rate of 1 USD is approximately equal to about 7.15 CNY This evidences the relative stability of the renminbi versus the US dollar Besides, in this way, not only the competitiveness of Chinese export products is not undermined but also favourable conditions for enterprises are created domestically Regular interventions in the foreign exchange market are widely used by the PBOC, keeping the rate within specific limits to prevent big leaps that may hit economic activities hard

Moreover, China's foreign exchange reserves reached about US$3.2 trillion by the end of

2022, placing it in a good position to intervene stringently in the market whenever necessary Export growth has performed well due to the renminbi's stability, reaching over US$3.6 trillion in 2022, This proves that the controlled floating monetary policy has increased the competitiveness of Chinese goods in the global market while maintaining economic stability Furthermore, the PBOC has demonstrated its flexibility in monetary policy by adjusting the policy interest rate from 4.35% to 3.85% in 2022 to stimulate economic growth

These data show not only the stability and development of China's monetary system but also the influence monetary policies and exchange rates create in the business and export activity

of domestic enterprises That is why enterprises are to monitor such indicators so that they can correspondingly adjust business strategy according to the prevailing situation in the economy

3 Consistency of Exchange Rates with International Parity Conditions

Jan,2023 0,148 4.33% 3.65% 0,68% 6,40% 2,10% 4.30% 0.1334 0.1470 | 0.043

Feb.2023 0.1442 4.57% 3.65% 0.92% 6% 1% 5.00% 0.1382 0.1429 | 0.050

Apr, 2023 0.1447 4.83% 3.65% 1.18% 4.90% 0.10% 4.80% 0,1387 0.1431 0.048

Jun.2023 0.1379 5.08% 3,65% 1.43% 3% 0% 3.00% 0.1365 0.1360 | 0.030

Aug.2023 0.1378 5.33% 3.55% 1,78% 3.70% 0.10% 3.60% 0.1349 0.1355 0.036

Sep.2023 0.1369 5.33% 3.45% 1,88% 3.70% 0% 3,70% 0.1329 0.1345 | 0.037

Oct,2023 0.1367 3.33% 3.45% 1,88% 3,20% ~0.20% 3,40% 0.1329 0.1343 0.034

Dec,2023 0.1408 5.33% 3.45% 1,88% 3.40% 0.30% 3.70% 0.1359 0.1383 | 0.037

Mar.2024 0.1385 5.33% 3.45% 1,88% 3.50% 0,10% 3.40% 0.1343 0.1360 | 0.034

Apr, 2024 0.1381 5.33% 3,45% 1,88% 3,40% 0,30% 3,10% 0.1335 0/1356 | 0.031

May,2024 0.1381 5.33% 3.45% 1,88% 3.30% 0,30% 3.00% 0,1333 0.1356 | 0.030

The current exchange rate between the Chinese Renminbi (RMB) and the US Dollar appears

inconsistent with the International Parity Conditions, particularly when evaluated through the

lens of the International Fisher Effect (IFE) Specifically, in July 2024, the actual exchange

rate deviates from the forward exchange rate predicted by IFE This discrepancy highlights a

situation where the RMB is overvalued in comparison to the theoretical forward rate derived

from interest rate differentials

This overvaluation suggests that market dynamics, such as speculative activities, central bank

interventions, or deviations from expected inflation rates, could be distorting the natural

alignment suggested by parity conditions The inconsistency with IFE implies that the real

exchange rate does not fully reflect the expected changes in interest rate differentials between

China and the United States over time

Such a scenario could result in challenges for businesses and investors relying on predictive

models based on these parity theories For instance, firms operating in foreign exchange

markets may encounter unexpected risks, while policymakers might need to consider

additional measures to address these market inefficiencies and stabilize the currency The misalignment points to the complexity of global currency markets and the influence of external factors beyond theoretical frameworks like the IFE

4, Capital Controls

4.1 Inbound Capital Controls

+ Sectoral Restrictions:

Investments in certain industries, such as technology and finance, require explicit government approval These sectors are heavily regulated to protect national security and maintain control over strategic industries The Negative List outlines industries where foreign investments are restricted or prohibited entirely

+ Foreign Exchange Restrictions:

Limited convertibility of the Chinese Yuan (RMB) adds complexity for foreign companies managing international settlements and cash flows Foreign businesses face administrative hurdles when remitting funds, such as dividends or loan repayments, requiring approvals from the State Administration of Foreign Exchange (SAFE)

+ Challenges for Businesses:

Strict regulatory frameworks and approval processes increase administrative burdens, requiring careful financial structuring and resource allocation by foreign firms

4,2 Outbound Capital Controls

+ Limits on Profit Repatriation:

Repatriating profits and transferring funds abroad face restrictions aimed at preventing large- scale capital flight and maintaining foreign exchange reserves SAFE requires detailed documentation and approvals for transactions exceeding certain thresholds, such as the $5 million limit for remittances

+ Control over Investments Abroad:

Overseas acquisitions are tightly regulated, especially for deals exceeding $10 billion or those unrelated to the investor’s core business State-owned enterprises face additional scrutiny for real estate and large-scale international investments

+ Macroeconomic Objectives:

These controls protect the RMB from speculative pressures and ensure China's foreign exchange reserves (approximately $3 trillion in 2024) remain a robust buffer against

5 Key Drivers of the Exchange Rate

5.1 Political stability

Under Xi Jinping's presidency, China's political landscape remains strongly centralized, and the Chinese Communist Party (CCP) holds extraordinary control over state functions

The anti-corruption campaign is still very strong and focused on the most important targets of the military and state-owned enterprises Recent investigations of senior military officers, including Admiral Miao Hua, prove that the attempt to strengthen discipline and loyalty in the ranks of the armed forces goes on On the other hand, targeting financial institutions and local governments helps to redeem public confidence

While the government still holds a very tight lid on dissent, there are growing signs of social unrest A spate of public attacks described as "social revenge" at the end of 2024 hints at deeper unrest caused by economic disparity, unemployment, and personal woes

China's foreign policy has stressed its role as a global power while keeping things stable The effort to ease tensions with the United States is an attempt to stabilize economic and trade relations, though issues of technology and security continue to pose challenges At the regional level, a number of initiatives, such as the Belt and Road, continue to expand China's influence despite criticism of their financial feasibility and transparency from participating countries

However, a number of important domestic challenges to the CCP's continued ability to sustain stability come from the economic pressures due to slowing GDP growth and a real estate crisis that render businesses and citizens financially unstable; a high unemployment rate, at around 17% in 2024, points out the structural incompatibility of the labor market with a lack

of openings in traditional industries What is more, there are also huge economic disparities between urban and rural areas; the latter often feels left behind in the march of modemization

Based on the data from December 2022 to September 2024, the CNY/USD exchange rate has been very volatile, driven by three key factors: change

in the differential between the U.S interest rate and China interest rate

inflation rate (AINF) and net export

5.2 Interest rate

Regarding the difference in differential between the U.S interest rate and China's interest rate, from December 2022 to September 2023, the tightening monetary policy increased the change

in differential of interest rates from 0.45% to 1.88% Therefore, this made the CNY more attractive to international investors and thus caused the exchange rate to fall from 0.1449 to 0.1369 However, the differential of interest rates, from October 2023 to September 2024, did

not change from its high level of 1.88% until it slightly went down to 1.78% in September

2024 This can be a sign of an adjustment policy for economic growth and slight upward pressure on the exchange rate

5.3 Inflation rate

Inflation was another important factor that influenced the exchange rate This compares to the increased pressure on the real value of the CNY between December 2022 and February 2023,

as inflation rose from 4.7% to 5.0%, causing the exchange rate to rise from 0.1449 to 0.1456 However, from March 2023 to September 2023, inflation kept falling steadily from 4.3% to 3.7%, acting to strengthen the real value of the CNY and decrease the exchange rate down to 0.1369 By 2024, the inflation further declined to reach all-time lows from 3.4% in October

2023 to 2.0% in September 2024 This further contributed to the stability of the exchange rate, which ranged between 0.137 and 0.1425

5.4, Net export

The most critical determinant of the exchange rate was net exports Within December 2022- March 2023, net export fell from $235.1 billion to $166.1 billion With a fall in demand for the CNY currency, the exchange rate has increased to 0.1456 from 0.1449, From April 2023

to September 2023, there was a heavy rise in net export as it has risen from 202.9 billion to 284.5 billion dollar This, in turn, created higher demand for the CNY and saw a drop in the exchange rate to 0.1369 By 2024, net exports kept rising well and reached an all-time high of

$318.1 billion in September 2024 The great performance in exportation acted as the leading determinant of the value of the CNY and kept the exchange rate in check

Generally speaking, high interest rates, effective inflation control, and robust export growth have been the basic factors that helped to stabilize the CNY/USD exchange rate over the