Essay on Controlability of the RMB

Decent Essays
Controllability means that changes in the RMB exchange rate can be controlled through macro-management. The reform should be propelled, but not be uncontrolled. Fluctuations in the financial market and economy should be avoided. Gradualness means to push the reform step by step, taking both present demand and long-term development into consideration.
All in all, China will continue to improve the formation mechanism of the RMB exchange rate, and further complete an exchange rate system gearing to the market with more flexibility. But the reform is broad and has far-reaching influences. A lot of preparation should be done, and favorable conditions and environment are to be created so that all aspects can bear out the possible influences.
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Present Scenario
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.

A big chunk China's forex reserves are tied up in low yielding US treasury bonds. This had made chinesse investors nervous about the possibility of a US default. Although US securities form a large part of China's forex reserves but this
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