...Float or Not To Float? International Finance 1 - What are the implications of China’s exchange rate policy on doing business with and “against” China? For years, China’s currency was undervalued. Many analysts and economists estimated that the Chinese currency (Yuan) was undervalued by 35%. So, for years, China kept a higher exchange rate. By doing so, China has some advantages but also some disadvantages. First, by undervaluing its currency, China keeps the Yuan as a weak currency, (because you need more Yuan to buy a US dollar). By doing that, China was able to keep a competitive advantage over other countries such as the US. Their products were sold for a cheaper price compared to the US products. But even if there are advantages, there are also disadvantages to have a high exchange rate. By having an undervalued currency, importations become really expensive. In fact, by having a high exchange rate, due to the price of importations, the deficit of China is also increasing. After several calls, the 21st of July 2005, China revalued its exchange rate from 8.28 Yuan per U.S dollar to 8.11 Yuan per U.S dollar. It implied other consequences on doing business with and “against” China. 2 - How is China’s exchange rate policy linked to its development strategy? How would changes in exchange rate policy impact growth in China as well as the rest of the world? Is the current exchange rate policy sustainable in the long run? China has known a relatively fast economic growth...
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... | | | | |Mode of examination : | | | |Essay | |For Students |School International School Major IET | | |Name 謝玉麟 Student No. 2010054425 Mainland Student [ ] Non-mainland Student [√] | | |Essay topic Understanding China’s trade surplus | |Evaluations | | | |Comments： | | |...
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...China’s Exchange Rate Regime and its Effects on the U.S. Economy John B. Taylor Under Secretary of Treasury for International Affairs Testimony before the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology House Committee on Financial Services October 1, 2003 Chairman King, Ranking Member Maloney, Members of the Subcommittee, thank you for giving me the opportunity to testify on China’s exchange rate regime and its effects on the U.S. economy. This is the fifth time that I have appeared before this Subcommittee as an Administration witness. Each time I have been asked to focus on an important facet of our international economic policy. I have testified on our policy toward emerging markets, on our policy for developing countries-including reforms at the Multilateral Development Banks and the new Millennium Challenge Account, and on our policy to remove barriers to the free flow of capital in our trade agreements-including those with Singapore and Chile. In each of these cases, an underlying goal of our policy has been to raise economic growth and increase economic stability around the world, and in doing so benefit the American people with more jobs, more security, and a better life. My testimony today on China’s exchange rate regime will be no different in this respect. The Overall International Economic Strategy for Growth and Stability The Administration’s major economic endeavor now is to strengthen the economic recovery...
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...China and the Esquel Group China and the Esquel Group In response to criticism of it pegging the Yuan to the US dollar, China recently implemented steps toward liberalizing its exchange rate policy; however, a floating Yuan has created uncertainty concerning its impact on China’s economy. While it is likely that allowing the Yuan to appreciate against the US dollar will result in undesirable impacts for China such as deflation, a reduction of foreign direct investment (FDI), and a decline in exports, we believe China will, and should, continue a tempered liberalization of its exchange rate policy. This is necessitated by the potential consequences China faces both politically and economically by not moving towards a floating rate. Politically, China will continue to absorb the majority of the blame for foreign countries’ rising trade deficits, spawning potential legislation dictating import quotas on Chinese products. Economically, a fixed exchange rate will continue to plague China by its dependence on exports and increase its risk of being able to maintain the value of its portfolio of foreign reserves, most notably the United States dollar. It is our belief that these risks outweigh the benefits of China continuing business as usual. As such, the Esquel Group should devise operational strategies that mitigate the risks of an appreciating Yuan, which include diversifying revenue streams by implementing a textile import division, pursuing growth in domestic textile...
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...Globalization and China’s Economic and Financial Development (Preliminary draft– not to be quoted 9/8/05) Gregory C. Chow To understand China’s economic reform and development since 1978 one may conveniently divide the topic into its domestic and international aspects even though the two are closely related. It is the purpose of this essay to examine the international aspects as China has taken part in the process of world economic globalization, a salient feature of world history today. The Chinese leader Deng Xiaoping who initiated and directed economic reform from a planned to a market economy understood the importance of globalization and adopted what he called an “open-door policy” as an essential part of the reform program. The term globalization refers to the crossing of national boundaries. It means the flow of goods, capital, information/technology and people across national borders. China practiced globalization in the Han dynasty (206BC-220AD) when trade took place between the Han Chinese and neighboring people in the North-west through the Silk Route. During the Tang dynasty (618-901) trade flourished and the Silk Route expanded as Chinese traded with the Romans. However, in the Qing Dynasty and in the period of the PRC up to Deng Xiaoping’s open-door policy China tried to close its doors and resisted globalization. I will survey the accomplishments of globalization for China’s economic...
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...15 • 2011 John Knight and Wei Wang China's macroeconomic imbalances: Causes and consequences Bank of Finland, BOFIT Institute for Economies in Transition BOFIT Discussion Papers Editor-in-Chief Laura Solanko BOFIT Discussion Papers 15/2011 20.06.2011 John Knight and Wei Wang: China's macroeconomic imbalances: Causes and consequences ISBN 978-952-462-711-5 ISSN 1456-5889 (online) This paper can be downloaded without charge from http://www.bof.fi/bofit. Suomen Pankki Helsinki 2011 BOFIT- Institute for Economies in Transition Bank of Finland BOFIT Discussion Papers 15/ 2011 Contents Abstract ................................................................................................................................ iii Tiivistelmä ........................................................................................................................... iv 1. Introduction ....................................................................................................................... 1 2. China’s macroeconomic imbalances ................................................................................. 2 3. China’s external imbalance ............................................................................................. 14 4. Reviewing the export surplus .......................................................................................... 22 5. The external surplus and foreign exchange reserves .................................
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...PESTEL analysis for China1) Political Factorsi.Constitutional SystemChina or People¶s Republic of China adopts socialist system or communism in their political system in their decision-making processes in governing the country.The country¶s sole political party in power is known as the Communist Party of China.The government have the sole power to control all activities done by their citizen as whathave been describe in how communism system worked in governing a country. Inother words, the purposes of working in China are to contribute to the nation and alsoto the government as the government control on all activities in the country.ii.Stability of Government. The stability of the China government is quite moderate and stable because theadministration of the government are not publicize to the public either through thepress or on the internet. So, the degree of the citizen involvement in the politics is lowbecause of the heavy restrictions impose by the government. However, the policiesimpose and the law regulations are quite effective in terms of economy where China isone of the leading countries in the world. In the recent years (2001), China has joinedthe World Trade Organization and results rapid growth in industrial and manufacturingsectors because of the cheap labor in China. But still problems such as managingenvironmental degradation, demographic pressure and the extreme immigration fromrural to urban area must be faced by the government.iii.Business FreedomThe...
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... Abstract China’s economy is growing ever larger, but is that enough to get the Chinese Renminbi (more commonly known as Yuan) to be accepted as a global market currency? This paper will look into the liberalization, but with Chinese characteristics, of five determining factors in becoming a country who’s currency is a global reserve currency. These factors are as follows: economic size, macroeconomic policies, flexible exchange rates, financial market development, and finally having an open capital account, and will ultimately prove the China is not quite the rising economic power some believe it to be (citation, 2012). Market Liberalization… with Chinese Characteristics In China, it is currently the year of the dragon, a symbol of good fortune and sign of intense power. With this symbol of fortune and power many Chinese are hoping for a year of economic prosperity, especially for the growth of the Renminbi, or more commonly known as the Yuan. In recent years, China has maintained that it’s “special” economy is pursuing a “market economy, but with Chinese characteristics”. Some of these characteristics include encouraging more of an international use of the currency, while being famous for their inflexibility with exchange rates, and not fully opening up the economy to the free flow of capital. However, the Yuan’s acceptance as a reserve currency will be based on China’s economic size, macroeconomic policies, flexible exchange rates, financial market development...
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...Topic: China’s financial liberalization Title: China’s financial liberalization and the policy transformation towards openness Author: Xuepan Cheng 4136801 Abstract This paper focused on the research of China’s financial liberalization reform in order to discuss the economic and financial effects casted by financial liberation. Also the article pointed out the current problems of China’s financial system and provided suggestions for implementation. The main argument of policy suggestions for China is to further lower down the financial limits, so that China will be able to build a better foundation for financial liberalization. Also the effective and constant supervision and modification of the financial regulation system is also necessary for maintaining a healthy macroeconomic environment and continuing capital flows. While the economic globalization, and financial liberalization has become a major tendency that attracts a lot of people’s attention in world economic development since the 1980s, the financial liberation and reform has become a necessity for China to develop it’s financial market and economy wellbeing. 1. Introduction China, as one of the fastest expanding economy in the world, is largely owing to the economic globalization, and financial liberalization since the 1980s. Economic globalization refers to the fact that economic resources (goods, capital, labor, technology, information and other transactions) flow from one country to another. This tendency makes...
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...Summarize and evaluate the arguments presented in the (A) case for and against the revaluation of the Renminbi. Provide your own assessment of the projected future direction of the RMB/USD exchange rate (using info provided in the case). China’s decision to release its currency from the decade long peg (approx. 8.28 Yuan per USD) raised multiple concerns within the global economic community. Many economists welcomed the decision while still others questioned it. Below is a brief description of the various arguments presented on the topic. Political: With the value of the Dollar decreasing over the recent years, the western governments are less pleased with China maintaining its currency at a fixed rate. The US and EU are of the opinion that the quasi-fixed exchange rate gives China a competitive advantage, creating a strain on their import surplus and thereby increasing their trade deficit with China. As of 2005, China’s exports and imports to and from the U.S was $86.9 and $27.6 Billion USD. Members of the US congress have threatened to impose tariffs against China if they do not agree to a revaluation. Allowing the Yuan to float would result in an increase in price of Chinese exports to the US and a decline in the price of US imports into China, hence narrowing their trade deficit. On the other hand, analysts argued that the increase in Yuan’s value between 94-01 was not an absolute result of inflation differentials between China and its trade partners. The large increase in...
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...China’s Renminbi: “Our Currency, Your Problem?” Problem Statement In 2006, China has undergone pressure by many countries including the United States. The U.S. believed that the renminbi (RMB), failed to appreciate eliminating job opportunities for other countries. However, China’s officials reacted by implying that China was a sovereign country with the right to choose its exchange rate policy. Pertinent Facts The exchange rate is one of the key factors that could possibly affect foreign profitability. In the case, Fung and Wong indicated in 2006, that China had become the world’s third-largest exporter with an estimated $970 billion and earning $1.2 trillion in foreign currency reserves (Fung). The U.S. and other countries are concerned that the Yuan was undervalued which will ultimately raise the demand for Chinese exports and decrease China's demand for imports from other countries. Becker states that if China keeps the dollar and the currencies of other countries artificially expensive compared to its currency it will create a problem towards other economies (Becker). The U.S. believes that China is manipulating the exchange rate to increase trade and dollar assets. The United States have also expressed extreme concern with China’s way of trade. For example, the U.S. questioned the fact that the renminbi is being a peg against the dollar. This case analysis will subsequently identify the following answers to the questions: * Should China...
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...Part 2 Introduction China’s export growth and penetration have been remarkable. While China was basically a closed economy 30 years ago, it is now the leading exporter to Japan, the second leading exporter to Europe, and the third leading exporter to the US. This surge in exports has been accompanied by growing trade imbalances between China and the rest of the world. China’s global current account surplus equaled 9% of Chinese GDP in 2006 and 11% of GDP in 2007 (Thorbecke & Smith, 2010). These surpluses are primarily with the US and Europe. Due to these factors, the exchange rate policy of China has attracted a great deal of attention in academic, industrial and political arenas. With the emerging China economy as the largest reserve country and the largest “world factory”, the Chinese renminbi (RMB) exchange rate has been the centre of ongoing debate over the source of global current account imbalance, especially with the United States (Sato, Shimizu, Shrestha & Zhang, 2012). Since the direct peg to the dollar was ended in 2005, the RMB has continued its appreciation about 6% per year and enhanced flexibility over the past 7 years. However, appreciation pressure on the RMB remains intense and it is still debatable whether and to what extent the current level of the RMB exchange rate is overvalued or undervalued. Issues Political Influences One of the main reasons for the appreciation pressure on the RMB is the US’ claim that the Chinese government has made the...
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...RMB as a Regional International Currency: Costbenefit Analysis and Roadmap Jing LI 1 Abstract With the rise of China, following the enhanced economic and trade relationship between China and Asian economies, and China’s increasing importance in the world economy, China’s national currency, the renminbi (RMB) will be getting global from Asia. As regional internationalization of RMB is doubleedged, in order to eliminate the financial risks brought by this process, maximize the benefits, it is necessary for China to consider the trade off between costs and benefits of RMB internationalization. RMB internationalization is a dynamic process, in accordance with the different level of the process, the phased strategy should be implemented, and the corresponding policies should be pursued too. Key word: RMB internationalization Cost and benefit Roadmap Introduction If you travel in the Asian region, you will notice that the Chinese renminbi is appearing more often in shops and restaurants, driven by the rapid growth in mainland tourist volumes. Will Chinese Renminbi be the next world currency? Since 2000, RMB internationalization has attracted great attention from the policymakers and the academics both at home and abroad. There is sizable RMB circulation in China’s neighboring countries and economies, even RMB can be fully convertible in some developed countries, some of neighboring countries and economies treated RMB as a reserve currency. This is a new economic...
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...Exchange Rate Manipulation China’s stock market crashed on July 9th, 2015 within just a matter of minutes, now that it is nearly three months later, how is their attempts at recovery going to affect the rest of the world? As China’s economy declines, their attempts to stop their own economic bleeding is only putting a stop to the United States economic recovery through exchange rates. Current exchange rates are will hurt the U.S. economy due to China’s devalued currency against the U.S. dollar. China’s devalue in their currency and has now has their banks allowing is to set exchange rates in line with free market practices making them more market-oriented in terms of exchange rate which is something American officials want. In April, right before the crash of China’s stock market, the U.S. Treasury Department was praising China for their recent efforts in raising their value of their currency since it was undervalued (Swanson, 2015). However, this was short-lived since just after, China’s economy fell and they devalued their already low currency even lower. For many years U.S. Congress and American businesses have said China’s currency was far too weak and China’s set rates allowed their exporters to sell off their good at artificially low prices in the world market. Due to this market force, this allows the currency to depreciate instead of appreciating, allowing Chinese products cheaper compared to American products (Wei, 2015). The Chinese central bank devalued their...
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...mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory. Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses. Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves. This policy is good for China’s export-oriented state-industrial complex, not so good for Chinese consumers. But what about the rest of us? In the past, China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low — although what we did with those low interest rates was mainly to inflate a housing bubble. But right now the world is awash in cheap money, looking for someplace to go. Short-term interest rates are close to zero; long-term interest rates are higher, but only because investors expect the zero-rate policy to end someday. China’s bond purchases...
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