A Note On Chinas Fixed Exchange Rate

The change in the exchange rate policy to move to a more flexible floating exchange rate system will inevitably compromise China’s current advantageous position in trading especially the export which takes a heavy weight in China’s GDP. The appreciation of RMB will deprive the Chinese enterprises of the advantage to leverage the cheap materials and labor to compete in the international market. This might be a positive indication for China’s importers who has a focus on the domestic markets rather than the international market, where the importers’ purchasing power gets enhanced if the domestic currency appreciate. However, China is still heavily relying on export to grow their GDP at this point and a revaluation of RMB would be very dangerous for the country. Thousands of factories counting on exports might be closed and millions of workers would lose their jobs. As pointed out by Morgan Stanley Economist Andy Xie in the case, “China’s priority is stability and currency flexibility should not be allowed to conflict with this goal”. On the flip side though, a revaluation of the RMB would not necessarily change the current situation of US and EU who had a large trade deficit with China. The reduced imports from China are unlikely to stimulate the growth of the domestic productions of those

China, the largest growing market in the world, currently has a policy regarding monetary regulation that allows the Yuan to “float”. This has seen the Yuan appreciate by approximately 24% over the past few years. Today, the exchange rate between the Chinese Yuan and the American Dollar is approximately 6.3 Yuan to 1 Dollar. Some argue that China should revalue the Yuan again the dollar, establishing a more fixed exchange rate. Others believe that current should allow

It seems that with flexible exchange rates in China, it feels like two steps forward, one step backwards. While they are indeed moving toward a floating exchange rate, it is a slow going process filled with exhaustive government control and regulation.

From the 1970s, there has been a wave of liberalization in China, which was introduced by Deng Xiaoping. This is one of the key reasons to the rise of China to be one of the economic giants in the world. In the last 25 years of the century, the Chinese economy has had massive economic growth, which has been 9.5 percent on a yearly basis. This has been of great significance of the country since it quadrupled the gross domestic product (GDP) of the country thus leading to saving of 400 million of their citizens from the threats of poverty. In the late 1970s, China was ranked twentieth in terms of trade volumes in the whole world as well as being predicted to be the world’s top nation concerning trading activities (Kaplan, 53). This

The China market provides many opportunities for foreign firms to take part in its economy; this is different from transferring parts of an industry to China – taking advantage of high quality labor at low costs - for the purpose of re-exporting.

So it is easy to conclude that china’s economic markets are sluggish and weak, for these reasons, China should adopt this monetary strategy to deal with these series of problems, and keeping the healthy and steady growth in economic markets. On the other hand, China wanted to increase the monetary (Yuan) liquidity, further, wanted Yuan to become international reserve-currency. Broadly speaking, China hoped to consolidate its central position in the global economic markets. In conclusion, pulling the healthy and steady growth internally and pushing Chinese monetary (Yuan) circulate in the international economic market, externally are the two key factors drove China to devalue Yuan.

“The real currency war is actually between Chimerica -- China plus America -- and the rest of the world,” Ferguson said in an interview at the World Knowledge Forum in Seoul. “It would be much better to have some kind of Plaza-like international agreement and I very much hope that at the G-20 summit in Seoul next month this will be No.1 on the agenda.” The Plaza Agreement reached in 1985 prompted a decline in the U.S. dollar against its Japanese and German counterparts. Brazilian Finance Minister Guido Mantega said last month that a “currency war” was under way, in which economies are weakening currencies to support exports. At an International Monetary Fund meeting this month in Washington, finance chiefs failed to narrow differences over currencies, with China accused of undervaluing the yuan and low U.S. interest rates criticized for flooding emerging markets with cash. “Currency appreciation is necessary,” Ferguson said in the interview late yesterday. “If you insist on building up a vast horde of dollar-denominated reserves you will create distortions in the world economy that will ultimately come back and bite you.” China doesn’t need a dollar peg, because its workers

The Chinese Central Bank devalued the RMB on August 11, 2014 which was the largest drop in the RMB ever. And the devaluation continued for two days and accumulatively knock 4.4% off the value of RMB on August 13, 2015(COUGH & BRADSHER). While Chine grew to become the second largest economy in the world, RMB, as the national currency of China has been gaining in value steadily and such a sudden downward move raises worldwide attention. The problem is that the devaluation of the RMB has caused the slowdown of Chinese manufacturers. As a result, Chinese companies will lay-off employers.

Since the initiation of the economic reform and opening up policy in 1978, China has experienced a rapid economic growth over the last few decades. An average growth rate of 10% per year in gross domestic product (GDP) has transformed China into the second largest economy with GDP of $9.240 trillion dollar in 2013. Over 500 million people were lifted out of poverty as a result of its economic success. As one of the world’s fastest growing economy, China has expanded their economic presence globally, with trading partners all over the world. Benefiting from its demographic dividend and globalization, China has become the manufacturing powerhouse and a major contributor to the world’s economy. About 232 countries import goods from China with U.S, Japan, and Korea being the major importers of Chinese products.1

The economy in China has always been inspiring to me, how this country made all of this civilization and how this country used its economy to overcome the barriers which it faced by used lots of methods. One of these method is the ‘’Exchange Rate Issue’’ in general is the low value of your currency to increase the investments and therefore, will increase the rate of employment. So, an important determinant of foreign trade and foreign investment is the exchange rate. A low value of Chinese RMB makes Chinese exports cheaper and investment in China more attractive if the investment is to produce for export. Many countries in the world including those in the European Union, Japan and Taiwan, have adopted the flexible exchange rate system while China adopted a fixed exchange rate up to July 2005 but the government did change the fixed rate several times in the 1980s and early 1990s relative to the US dollar as its government deemed appropriate. Most recently the Chinese government has adopted a managed floating rate with the government deciding the rate around a small band daily relative to the value of a basket of foreign currencies but the basket is not explicitly specified. There are pros and cons of the fixed and the floating exchange rate systems. (See the Appendix for a more detailed discussion.) A fixed exchange provides an anchor for the government in the conduct of its monetary and fiscal policy. It limits the discretionary power of the government in the exercise of its

In 2013 Yuan appreciated by 2% as People's Bank of China allowed market forces to push the Yuan. Exporters have been hit hard by this move who relied on weak currency to remain competitive in international markets. But this controlled rise of the currency has still left countries sceptical that China will not intervene in forex market. Chinas forex reserves have increased tenfold in the past decade. Due to the resulting trade surplus central is forced to intervene to preven the Yuan from appreciating.In the 3rd quarter of 2013 China's forex reserves have increased by more than $163 billion to a record 3.66 trillion US dollars.. Despite a 0.3% decline in exports in September agaisnt an expected 6% rise , the increase in forex reserves is a clear evidence of market intervention by the central bank. In March central bank deputy governer said that China will reduce its interventions and will follow a more flexible currency policy. But an analysis of export data shows that central bank intervened in the currency market to prevent fluctuation of the currency. Even though Yuan has strengthened by 4-.4.3% over the past 2 years economic growth drivers have not shown any significant change.

There has always been a persistent hustle between reality and its abstractions. Seldom do we find that a model aimed at capturing a portion of reality has provided both accurate and consistent results. Such a friction between reality and a proposed model of it can also be found in the case of China’s credit policy. The People’s Bank of China (PBoC) fixed the exchange rate of the yuan to the US dollar in the middle of the 1990s. In spite of the currency turmoil and depreciation during the Asian crisis, the Yuan Renminbi (RMB) was held at 8.28 to a dollar although there was a 50% depreciation. After 2005 the RMB exchange rate was only allowed to appreciate on tiptoes at 5% a year to the dollar before the Great Financial Crisis

Floating exchange rates and fixed exchange rates each provide distinct advantages and disadvantages for a given regime. In any given state of the global economy, one given country may be better suited for one system. But there are a number of factors that influence this, and there is therefore no universal correct system for all international economies.

China’s exchange rate policy in 1950s and 1960s was mostly determined by the nation’s geo-political, security, and strategic interests. China revised its currency reforms on January 1, 1970, by substituting 10,000 renminpiao for one renminbi (RMB) and it fixed an official rate of 2.46 yuan to a dollar. Since July 2005, China has been implementing the managed exchange rate policy, i.e. the RMB is pegged to a basket of foreign currencies, notably the US dollar. Many

In 1994 the Chinese government made the decision to peg the RMB to the US dollar at a rate of US$1 to RMB8.7, a year later the Renminbi appreciated 5% and was revalued to RMB8.28. This rate would remain unchanged for the next 10 years, even though the Chinese faced heavy scrutiny and pressure to revalue their currency. The Chinese exercised many policies in maintaining their exchange rate. The PBoC controlled the amount of foreign currency by forcing all exporters to immediately sell their foreign currency to designated banks. The RMB could only be traded on the China Foreign Exchange Rate