The Main Types Of Exchange Rate

Many economists – focusing on the strain the tightly managed exchange rate imposed on China’s economy – agreed that China needed to institute more flexibility. They noted that not only was the exchange rate expensive to sustain, but it contributed – as well as limited China’s flexibility in responding – to a

Since July 21, 2005, China has adopted a managed floating rate regime based on market supply and demand with reference to a basket of undisclosed currency. The daily trading price of the U.S. dollar against RMB in the foreign exchange market will be allowed to float within a band of +/->0.3% around the central parity published by People’s Bank of China. The signal was initially interpreted by the international market as an indication that China would embark on a gradual shift toward increased flexibility which eventually adopt a floating exchange rate regime where the RMB will appreciate much against US dollar. However, they soon

In 2013, America imported over 440,433.5 million dollars’ worth of goods from China but only exported 122,016.3 million dollars. (U.S. Census Bureau Foreign Trade) If America and other countries trade so frequently with China and rely so heavily on Chinese manufacturing, production, and innovation, then the aspect of currency manipulation within China and its potential negative effects on world trade is a very significant topic of importance and reason to research the subject. Our

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

The renminbi currency has experienced a fixed exchange rate. The renminbi is seen as undervalued because the value of its currency has been scrutinized to be artificially low, which gives Chinese companies an unfair advantage over floating exchange rate countries such as the US. China has purchased more than $2.2 trillion in foreign exchange reserves in order to maintain an undervalued currency (Scott 2010). China buying US reserves increases the demand for dollars and increases the value of the dollar. Primarily, this makes Chinese goods cheaper in the US and US goods more expensive in China. Keeping a weak currency helps China to boost international exports because other countries purchase China’s goods at a relatively lower price. This helps to maintain growth in China’s economy and provide more manufacturing jobs, a staple to their economy.

´´Currency manipulation is the cause of the U.S. trade deficit with China´´ (Geithner, 2009 p8, Morrison 2009, p3, Feenstra 2006, p29 ) is one of the most common claims that economists make when regarding the current trade relationship between U.S. and China. Although several economic policy reforms have contributed to the management of the RMB (Chinese currency), the statement ´´ the larger China’s external surplus is, the more undervalued is the Yuan´´ established by Zhe (2007 p11) seems to clarify that China´s currency is being manipulated by the government. This kind these strategies in order to enhance its competitiveness. This currency manipulation is becoming a difficulty for U.S and China´s

The following paper coherently illustrates the trade patterns of USA and China and describes the various trade policies developed over the past years that have impacted the respective economies of both countries alongside the effect of the same on the bilateral trade relations between the two. Based upon the previous statistics, US-China trade is considerably one of the largest trading partners in today’s economies. Both countries’ trade relations entail exchange of investment, services as well as goods varying from agricultural products to non-agricultural products. Currently, China is the second-largest trading partner, third-largest export market and the biggest source of imports for the United States. The U.S. government’s debt purchased by China provides US the benefits of low interest rates (Morrison, 2015). While for few this economic relationship is considered to have a positive effect as it helps to fund the U.S. economy, for others it is an attributable concern that China may gain more power over the U.S (Loc.gov, 2016).

Under the environment of the Global Financial Crisis (GFC), the financial markets had a severe impingement, especially the influences to the American financial market. Meanwhile, as one of the largest American ‘trading partners’, the third largest ‘export market’, China offers USA a majority of imports and keeps close trade relation with USA (Morrison, 2011, pp2-6). It can be seen that the changes of U.S. dollar might affect the Chinese economy. In order to keep sustainable development, the Chinese government focuses on the influences of U.S. dollar alteration and considers whether it is beneficial to Chinese economy. Since 2008, U.S. dollar depreciation brings China plenty of benefits, whereas there still have a few

Finally given the slowing economy in Asia the International Monetary Fund (IMF) has reclassified the yuan. Previously the IMF considered it to be “substantially undervalued” compared to other currencies. The IMF has softened its tone toward the Chinese yuan and it is now considered “moderately undervalued”. This new designation makes it harder for the United States government to make a case against and therefore policies to target the imports based on the Chinese yuan. (Davis, 2012)

Like stated previously, each factor has its own respected relationship to the exchange rate within the global market. But a large influence is in part to how much a currency is worth is correlated to how much value that currency is backed by the local government. Physical cash has to be supported by goods and/or gold for the currency to be worth anything. This value comes from a balance with in accounts and controlled government spending. The current account is the balance of trade between a country and the trading market, based off of all payments between other countries for goods and services. Any deficit in the current account shows if there is more being spent on imports products than being earned by exporting its own goods. These deficits in turn force countries to borrow capital from foreign sources to make up for this difference to keep the balance. “This excess demand for foreign currency lowers the country 's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.” (Van Bergen)

The topic of Chinas fixed exchange rate has remained as one of the fiercest subject in global macroeconomics for an extensive period of time. A fixed exchange rate or pegged exchange rate is where a currency value is fixed against the value of another currency, in the example of China, the Yuan or Renminbi it is currently pegged to the US dollar, it has been fixed to the US since 1994 however within the past decade it has been allowed to appreciate a little at a time. But in times of economical difficulties such as 2008 ‘China halted the Yuan’s appreciation as worldwide demand for Chinese products slumped due to the global financial crisis’ (Picardo, 2009), this shows the given Chinas recent economic difficulties government may keep the

After market reforms where announced in the late 1970s by Deng Xiaoping (paramount leader), China has been among the most rapidly growing economies in the world. Although having serious natural resource scarcity this growth has been speared headed through 80% of china’s exports are manufactured goods making china heavily dependant on international markets (export-led) . The Gross Domestic Product per capita (GDP) of china in 1962 was at record lows of 130.14 USD, since market reforms, China regularly exceeding 10% GDP growth annually (figure 1) and was last recorded at 6416.18 US dollars in 2015 .

China’s currency is quite cheap. In fact, some countries have complained about China’s devaluation of their currency; a brigade led by President Donald Trump. The Chinese have their own very good reasons on why they desire to keep their currency on the lower end. They use the pegged exchange rate, where the government determines the value of the Yuan against the dollar at intervals of their choice. The government of the People’s Republic of China does not allow the competitive market forces to take charge of determining the value of their currency. This cheap value of the RMB has been a significant factor in the booming economy of China (Inman, 2015).

In the 11 years, the international economic situation has undergone great changes; pegging the RMB exchange rate formation mechanism type has become increasingly unsuited to China 's economic reform and development requirements. It is demonstrated by the defects are:

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