...Pass-Through Effect of RMB Exchange Rate on China’s Inflation Contents Chapter 2 Literature review 3 2.1 Introduction 3 2.2 Exchange rate pass-through effect 3 2.2.1 Narrowly defined exchange rate pass-through effect 3 2.2.2 Broadly defined exchange rate pass-through effect 4 2.2.3 Complete and incomplete exchange rate pass-through 5 2.3 Relevant theories of exchange rate pass-through 7 2.3.1 Theory of complete exchange rate pass-through 7 2.3.2 Theory of incomplete pass-through 9 2.4 Empirical research on exchange rate pass-through 13 2.5 Summary and reflection 16 Reference 19 Chapter 2 Literature review 2.1 Introduction This chapter reviews the theoretical and empirical researches on exchange rate pass-through effect. Specifically, this chapter firstly introduces the definition of exchange rate pass-through effect, incomplete and complete exchange rate pass-through. Then, this chapter analyses the theory of exchange rate pass-through effect, with focus on the reasons for the common incomplete exchange rate pass-through effect. After theoretical analysis, this chapter reviews and analyses the empirical research on exchange rate pass-through effect. A major part in this section is the review of the perspective and method for analysing exchange rate pass-through effect. Empirical researches generally referred to McCarthy (2000)’s research method, used VAR model, and selected specific area and time window data to empirically analyse exchange rate pass-through...
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...The relationship between stock prices and exchange rates in China Mengyuan Chen Illinois Wesleyan University Dec 10, 2012 Abstract This paper uses the data of RMB exchange rates and stock market prices in China from 1994 to 2011 to estimate the relationship between stock prices and exchange rates. There are two major theories concerning the relationship. According to the portfolio balance effect, these two variables should be negatively related; in addition, according to the international trading effect theory, these two variables should be positively related. The linear regression model is adopted to observe the various relationships between stock and foreign exchange markets. The results confirmed my hypothesis, which indicates that the international trading effect is more dominant, thus the net effect is a positive causal relationship from exchange rates to stock prices. I. Introduction Within the emerging Chinese market, China now has more open policies and advanced financial market instruments to promote globalization. For example, China started to allow the RMB to float within a larger daily range in 2005 and brought derivative options into the stock market. These significant steps all suggest that China is beginning to face a new economic condition. For instance, the challenging policy making of RMB exchange rate is one. Exchange rates and stock prices are both key indicators of the economy and financial markets. So the relationship between those two becomes an...
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...IMF POLICY PAPER REVIEW OF THE METHOD OF VALUATION OF THE SDR NOVEMBER 2015 IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package: The Staff Report prepared by IMF staff and completed on November 13, 2015 for the Executive Board’s consideration on November 30, 2015. Two Staff Supplements titled Review of the Method of Valuation of the SDR— Weighting Formula and SDR Interest Rate and Review of the Method of Valuation of the SDR—Revised Proposed Decision and Illustrative Currency Amounts. The following documents have been or will be separately released: A Press Release summarizing the views of the Executive Board as expressed during its November 30, 2015 consideration of the staff report. The Executive Board, in its formal meeting on the review on November 30, 2015, adopted the revised proposed decisions contained in the supplement Review of the Method of Valuation of the SDR—Revised Proposed Decision and Illustrative Currency Amounts. These decisions will govern the weights of currencies in the SDR currency basket effective October 1, 2016. The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents. Electronic copies of IMF Policy Papers ...
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...of RMB against USD, EUR and JPY. Figure 1 Figure 1 represents movement between the nominal and real exchange rates of Chinese renminbi (RMB) against US dollar (USD) between from January 2005 to December 2013. It shows that the nominal exchange rate of RMB/USD is higher than the real exchange rate throughout the period of observation indicating that the RMB is undervalued. This clarifies that the USD is buying more RMB in nominal terms than it should be in real terms. The increase in nominal exchange rate of RMB/USD is termed as a nominal depreciation of the currency after de-pegging whereas the real exchange rate of RMB/USD continues depreciating in the years of observation as shown in Appendix 2. It also shows that the RMB was depreciating against USD in every quarter after de-pegging. Table 1 compiles the average quarterly percentage of over-or-undervaluation of the RMB against USD, euro (EUR) and the Japanese yen (JPY) from January 2005 till December 2013. Before the de-pegging, the RMB was found to be overvalued by of 1.19% against the USD in January 2005 then it was discovered to be undervalued since March 2005 by 0.58%. The RMB continues being undervalued against the USD and reached its highest percentage at 28.49% in March 2013. By December 2013, the RMB was still undervalued by 28.35% against USD. Overall, the RMB was overvalued against the USD by 16.94% in the period of observation. Figure 2 Figure 2 demonstrates movement of the nominal and real exchange rates...
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...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 value of its currency artificially low by manipulating the exchange rate. The weakened RMB in turns spurs imports from China and undercuts exports to China, contributing to a widening trade gap between China and the US, Japan and the Euro countries. This in turn causes job losses in manufacturing in those countries. Empirical tests show...
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...Depreciation of the RMB against the USD By: Hasnaa Taih Course: ECN 450 Date: 28/03/2011 China has a high level of policy intervention in the depreciation of the Renminbi (RMB) or (CNY). The depreciation of the RMB against the United States of America’s Dollar (USD) puts the USA’s firms and factories at a massive competitive disadvantage (China Currency Overview, 2010). There are two economists’ viewpoints when it comes to the undervaluation or overvaluation of the RMB against the USD and against other world currencies. There are economists that argue that the RMB is overvalued against some world currencies beside the Euro and the USD (Yuan is Overvalued, not Undervalued: report, 2010). Other economists argue that the RMB is undervalued against the USD, and this would be the major focus of this research paper. The RMB’s depreciation allows China to unfairly gain trade advantages over other trading nations. Economists views varies on the level at which the RMB’s undervaluation affect other Chinese trading partners. But most economists agree that currency flexibility would be of great help to decrease global imbalances (China Currency Overview, 2010). This research paper will discuss the different component of the Chinese protectionism policy for its exchange rate, and its effects on other nations such as the USA. The focus will be in showing the advantages and disadvantage for the USA and China in the trading balance. Historical background of the RMB: Preceding...
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...the Relationship between stock return and exchange rate: evidence on China Yaqiong Li a b , Lihong Huang b a b The Business School, Loughborough University ,UK College of Mathematics and Econometrics, Hunan University, Changsha ,Hunan ,China Abstract The purpose of this paper is to investigate the relationship between RMB exchange rate and A-share stock returns in China, in particular in Shanghai stock market. We find that both stock returns and RMB nominal exchange rate are integrated of order 1. The Engle–Granger cointegration test is then performed, suggesting that there is not a long-run equilibrium relationship between stock returns and RMB exchange rates at 5% significance level. However, there is strong evidence suggesting that there is a short-run uni-directional causality relationship from the nominal exchange rate to the stock returns. Keywords: cointegration; Granger causality; RMB exchange rate; stock return; unit root test. 1. Introduction The China’s exchange rate policy has recently emerged as one of major issues in the trade between the PR of China and the United States of America. The controversy is fuelled by China’s pegging of RMB to USD. Since a major devaluation of the RMB in 1994, the Chinese currency’s exchange rate vis-a-vis USD remained more or less unchanged until 21 July 2005, and has fluctuated from RMB 8.22 to 8.11 per dollar since then. The Chinese Authority has recently announced that “RMB will be no longer pegged to the US dollar”...
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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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...First of all, there are some economic concepts that need to be explained. China has a favourable balance of trade, which means nowadays China exports more than imports; however, U.S. has run a trade deficit every year for more than thirty years, which means U.S. imports more. The import and export are always connected with the exchange rate. For instance, if you are exporting and your local currency becomes strong then your products become more expensive for your buyers. If you are importing and your local currency becomes weak then the products you are importing become more expensive. As we can see, China is exporting more to the U.S., so I would assume that one of the reason why U.S. would import more from China may be the exchange rate of China’s currency Yuan is slumping; in the other word, RMB depreciated against U.S. dollar. In this case, U.S. can buy more stuff with the same amount of U.S. dollar. There is another reason I would like to mention which is the inflation rate. First of all, purchasing powers parity is a theory that states the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that rate...
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...Kong. Between September in 2010 and September in 2010, the total amount of renminbi deposit has risen more than 300% from RMB149 billion to RMB622 billion. The rapid increase could be accounted for the poor performance of the equity market, leading to the search for another alternative investment for investors’ savings. When equity market is not doing well, RMB deposits and debt instruments could be no doubt the alternatives. Secondly, the expectation of the appreciation of renminbi has led to a rise of expected return on renminbi deposit, which increases the value of the renminbi, and it attracted more investors to deposit their money in reminbi. Comparing to the low Hong Kong dollar-deposit interest rate, which is around 0.1% because of following U.S. interest rate, Hong Kong dollar deposit became less attractive. Third, the cross border RMB trade settlement and the signing of the Supplementary Memorandum of Cooperation between the Hong Kong Monetary Authority and the People’s Bank of China on RMB business showed the determination of the support on Hong Kong’s renminbi offshore market. Owing to the exchange rate, interest rate, and the support from the Chinese...
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...Security Policy.” Comparative Strategy, 1988, 7, pp. 143-158. Grassman, Sven. “A Fundamental Symmetry in International Payment Paterns.” Journal of International Economics, 1973, 3, pp.105-116. Hartmann Philip. “Curency Competition and Foreign Exchange Markets: the Dolar, the Yen and the Euro.” Cambridge University Press, 1998. Hayek. F. A. “The Denationalization of Money.” 2d ed. London :Institute of economic Afairs, 1970. Ito, Takatoshi, “The Yen and the International Monetary System,” in C.F. Bergsten and M. Noland, eds., Pacific Dynamism and the International Economic System, Washington, D.C.: Institute of International Economics, 1993, pp.299-322. K. Sato, “The International Use of the Japanese Yen: The Case of Japan's Trade with East Asia”, The World Economy, 22 (4), 1999, pp. 547–584. Kenen, Peter B. “International Money and Macroeconomics,” in K.A. Eliot and J. Wiliamson eds., World Economics Problems , Institute for International Economics, Washington, 1988. Li Daokui, Liu Linlin,”To Promote the Internationalization of RMB in a way of Dual System”, China Finance, 2008, No. 10, pp: 42-43. Lin Yifu, “Three Conditions of the RMB Internationalization”, Wen Wei Po, June 28, 2009. 24 McKinnon, R. I. “Money in International Exchange: The Convertible Curency System.” Oxford University Press, 1979. Mundel, Robert. “Options for Monetary Reform.” Cato Institute, 1983a. -. “The Case for a Managed International Gold Standard,” in Michael Connoly ed., The International Monetary System:...
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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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...Case Study Why the telecoms industry is doing business in RMB Telecoms equipment and handset manufacturers like Telco – the representative but fictional example in this case study – recognise that they can only stand out in a tough sector by competing on an international scale. This increasingly means doing business in high-growth emerging markets like China and leveraging RMB to gain that vital competitive advantage. Background Telco, with its Head office based in London, began life as a manufacturer of wire-line equipment for the Western European aerospace sector. Following the privatisation of national telecoms operators from the late 1980s, it refocused its business to supply carriers in Europe and the US. Telco has been an HSBC client for more than ten years, after finding that domestic banks could not match its international expansion strategy. HSBC’s global network supported its exports growth across new markets by supporting all Telco’s export invoices. Rolling waves of telecoms deregulation saw Telco and other suppliers enter the mobile handset market in the 1990s, attracted by the significant growth opportunities. The intense competition and tightening margins in equipment supply – not least the demand from emerging markets – saw Telco make its first trip to China on a sourcing mission for basic components. Building a business In China At the company’s request, HSBC relationship managers helped guide Telco’s entry into China by working with professional advisors...
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...In- Class Exercise CH 5: Foreign Exchange Market [Class-1] Question 1: From the following table identify whether USD has appreciate or depreciated against the foreign currency Today | Yesterday | Appreciation or Depreciation of USD against Foreign Currency | 1.32 USD/EUR | 1.30 USD/EUR | USD Depreciate against EUR | 0.75 GBP/USD | 0.80 GBP/USD | USD Depreciate against GBP | 0.45 USD/CHF | 0.50 USD/CHF | USD Appreciate against CHF | 11 MP/USD | 12 MP/USD | USD Depreciate against MP | 6.75 RMB/USD | 6.60 RMB/USD | USD Appreciate against RMB | Question 2: From the following table identify which one is direct or indirect Quote Currency | Quotes | Direct or Indirect? | Swiss Francs | 1 CHF for $0.50 | DQ | Mexican Pesos | 10 MP for 1 USD | IQ | British pounds | 0.75 GBP for 1 USD | IQ | Euro | 1.32 USD for 1 EUR | DQ | RMB | 6.75 RMB for 1 USD | IQ | Question 3: Calculate cross rates from the following currencies FOREX Rates | 1.32 USD/EUR | 0.75 GBP/USD | 0.75 USD/CHF | 11 MP/USD | 6.50 RMB/USD | GBP/EUR | = GBP/USD x USD/EUR =1.32 x 0.75 = 0.99 GBP/EUR | RMB/GBP | = RMB/USD ÷ GBP/USD= 6.5 x 1/0.75 = 8.67 RMB/GBP | EUR/CHF | = USD/CHF ÷ USD/EUR = 0.75 x 1/1.32 = 0.5681 EUR/CHF | MP/EUR | = MP/ USD x USD/EUR = 11 x 1.32 = 14.52 MP/USD | RMB/EUR | = RMB/USD x USD/EUR = 6.5 x 1.32 = 8.58 RMB/EUR...
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...Chinese Yuan Bilateral Currency Swap Agreements. Nowadays internationalization of renminbi rises as many counties try to lessen their dependence on U.S. dollar. P.B.O.C. uses different instruments to drive expansion of RMB, weakening the U.S. dollar monopoly in the basket of the world reserve currencies. By 2013, the RMB is the 8th most traded currency in the world. On 17 August 2010, PBoC issued policy to allow Central Bank, RMB offshore Clearing Banks and offshore Participating Bank to invest the excess RMB in debt securities, in onshore Inter-bank Bond Market. In October, China further open up both FDI and ODI in RMB (Pilot RMB Settlement of Outward Direct Investment) and nominated Xinjiang as the first pilot province (which in early 2011 expanded to 20 pilot areas). In June 2013, United Kingdom became the first G-7 country to set up an official currency swap line with China. As of July 2014, 25 countries have signed the RMB Bilteral Swap Ageeement with PBoC with total facilities of over ¥2.7 trillion. These agreements tell us that China decided to increase the role of RMB in the world currency market. 2007: Creation of Dim Sum bonds and offshore RMB bond market The dim sum bond market generally refers to RMB-denominated bonds issued in Hong Kong. The majority of dim sum bond are denominated in CNH, but some are linked to CNY (but paid in USD). In July 2007, dim sum bonds worth a total of US$657 million were issued for the first time by China Development Bank. These financial...
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