Q: I have heard that the Chinese currency will be unpegged from the US Dollar. What does this mean to my business in China?

A: On July 21, 2005, the Chinese government no longer is linking the value of its currency to the value of the US Dollar. Linking one currency to another is called "pegging". To create a true market economy, nations must value their currency against other currencies in order to establish a reflection of market demand. China began this process in 1994. In 1997, during the Asian financial crisis, China decided to link, or peg, its currency to the US Dollar in order to create a "stable" currency to buy. What this also did was create a currency that does not truly reflect the value of the Chinese currency, called the Yuan, also known as the Renminbi, or RMB, which translates to "the People's money" in Chinese. In 2001, China agreed to begin the transition from pegging the RMB to the US Dollar in order to be fully integrated into the World Trade Organization (WTO). One of the major reason's why the WTO requires China to de-peg from the Dollar is that Chinese goods and services are artificially cheaper for export with the peg to the Dollar.

So what does the change in China's pegging its currency to a basket, or grouping, of other currencies mean to a US-based firm? If you have set up your China contracts to be paid in RMB, you will get less cash for your goods or services. If you have your China contracts to be paid in US Dollars, you will receive approximately 3-5% more cash for your goods and services. If you are a building product manufacturer who exports goods to China, your goods will be cheaper for Chinese customers to purchase. If you are an importer of Chinese goods or services into the US, your imports will be more expensive for US customers. If you are traveling to China, your hotel will be cheaper to stay at as will your food and entertainment bills.

The rule of thumb of the revaluation of the RMB is that if you are US-based, this was a good thing, if you are China-based, things will be moderately more painful for the near future, but the balance between the two nations in the long term will become more equal.

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Thanks to Paul Doherty, AIA. He is the managing director of General Land Corp. a full-service, global real estate development firm with a focus on the Asia Pacific market. Paul is a thought leader, strategist and integrator of technology and business. He is an author, educator, analyst and consultant to Fortune 500 organizations, global government agencies and prominent institutions and is on the board of directors of the International Facility Management Association (IFMA). He can be contacted at pdoherty@general-land.com.

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