Introduction to Case Study:
This case presents the basics of monetary economics and presentation of the practical applications of monetary policy and the exchange rate to apply business decisions. Supported by case studies will debate on exchange rate policies that China adopted its 1978 and prior to following the significant economic liberation took place. Events specific exchange rate regime in the past few years, China has made to the relevant case highly controversial members of China's trading partners. The first goal of this study is to trace the history of this strife surrounding the Chinese currency, the renminbi (RMB), which translates literally into English as "people's currency". Next, we will discuss issues of the case. Finally, the case will be up-to-date regarding the current situation surrounding this issue brief detail.
performing in 2006 against a number of countries made strong allegations of China's trade China's exchange rate policy. The main objection was that the Chinese currency was undervalued due to China's exchange rate manipulation to suppress the prices of exports. Among other damage, these countries argue that this measure will cost them thousands of jobs. The United States had a $ 233 billion trade deficit with China, in the year threatened to be tariffs on Chinese imports if China does not revalue its currency. Japan and the newly industrialized economies such as Taiwan and Singapore, were less of, as we have tried to strengthen economic relations with China. However, the developing Asian countries supported the revaluation to be better prepared to compete with China. A collective group remained relatively silent lively debate in the media had occurred between 2005 and 2007, the multinational companies. These companies have benefited from lower operating costs in China, which for them meant cheaper land and competitively priced Chinese product exports.
China's exchange rate was sentenced in sync with market forces, several reasons to support this conclusion. First, the Chinese economy has experienced a 9% annual growth over the past decade. According to the Balassa-Samuelson hypothesis of rapid economic growth accompanied by a real appreciation for differences in productivity growth between the tradable and non-tradable sectors. Second, China has become the world's third largest exporter of at least $ 970 billion in 2006 China's exports experienced a 30% growth in recent years. Finally, there was a compilation $ 1200000000000 foreign exchange reserves. These deposition claim to be the result of manipulation of the RMB against the natural forces of the market.
Chinese officials strongly oppose the idea of the revaluation of their money for several reasons, the most powerful, perhaps they're a country that is heavily dependent on trade and growth is vital exports. Second, more than two hundred million rural residents have left the farms to find work in urban centers. Need for better economic growth absorb these workers into a functional economy. Apart from the economic reasons against changing exchange rate policy, officials in China, however, several counterarguments. First, the RMB, according to them, is not really undervalued and China's economic growth has nothing to do with manipulation of the currency. Second, the United States runs a large trade and budget deficits, partly by capital inflows from China, and we must look elsewhere to show off in front of the weakness of the economy. In addition, China is a sovereign country has the right to choose their own exchange rate policy. Chinese officials finally brought up the little-known fact that, despite the large trade surplus in the United States and Europe, it is also a great shortage others, particularly in Asian countries.
As mentioned in the introduction, China began to liberalize the country before 1978, then it was followed by the central planning and was stuck in the economic self-sufficiency. China's foreign trade was negligible, and there were hardly any foreign companies doing business in China. The RMB, at the time, was pegged to a basket of currencies and the exchange rate was set at unrealistically high. The currency is virtually non-convertible. Since 1978, China and the "open door policy" and special economic zones open to foreign investment. A small private sector has emerged. The devaluation of the RMB-1981 1985 and 1993 the US dollar in order to help Chinese exports. The RMB has appreciated 5% in 1995, which held until July 2005.
The squabbles started in July 2005 when China reformed its exchange rate regime. The RMB has appreciated by 2.1% to the dollar. The dollar peg to a basket of currencies is replaced by a wedge with a permitted fluctuation of 0.3% band against the dollar every day. This basket is dominated by the US dollar, euro and yen. Chinese partners in the basket of currencies selected based on trading volume and weight of the sources of foreign direct investment ( "FDI") and the composition of Chinese debt. In May 2007, the Chinese central bank announced that it is expanding daily fluctuations of the RMB against the dollar by 0.5%. This was followed by an appreciation of the currency by 7.2% against the dollar.
Chinese officials multi-site option would be to put the money to replace the revaluation. The first proposal to reform the banking sector, where up to 40% of the loan, which is weaker and nine out of ten state-owned bank. Second, they propose to "go abroad" policy encourages Chinese enterprises and foreign investment so as to encourage FDI outward. Finally, Chinese officials would impose voluntary export taxes. Unlike tax revaluation does not affect the value of foreign currencies. In addition, the Chinese government would receive much needed tax revenue.
Case Analysis and Discussion Questions:
Now, this paper will discuss responses to questions from the case itself. For the first two questions are concerned with how much further China let the currency appreciate, and to determine whether this is not undervalued as the time of writing this piece. First, China will never let the currency fall this far. It has an abundant source of cheap and skilled labor force, the generally high level of education and do not need to manipulate in order to exploit the strong currency exports. Yet, this is precisely the action of the officers were Chinese. This must be stopped immediately, before trading partners are forced to suffer. As for the second question, the clear evidence that the currency is undervalued. Given the high level of FDI entering China and a significant trade surplus, the RMB would have to assess in relation to the basket of goods, particularly with regard to the US dollar and euro both weakened recently.
The following questions are concerned with the effect of revaluation of China and its trading partners, and that a thorough reform should be gradual or not. Furthermore, the case study asks whether it would be a floating RMB exchange rate impact. Simply put, a revaluation would be the most useful trading partners and comes with a significant cost to China. Trading partners, including the United States and the euro zone will benefit not lose thousands of workers in the Chinese markets, as was the case when it comes to domestic companies relocated to China's favorable economic considerations. Developing Asian countries will be better able to compete with Chinese exports, if the revaluation takes place. Multinational companies do not favor such a move, as the status quo will allow them to continue benefiting from lower operating costs in China. China would lose the sense that the economy is likely to slow. It can be argued, however, that this was going to happen anyway, given the current situation in the global economy. Current business and political periodicals and magazines have pointed out that Europe is now in a recession, and the United States are not far behind. The credit crisis has not left China's economic growth is expected to reduce affects only about 8% in 2009, according to analysts, economists and Financial Times.
As already mentioned, China is highly dependent on trade and the growth in exports is vital. The revaluation eat competitive position. This is probably a negative effect on the labor market, as fewer jobs may be available for those in urban areas, including rural communities and entry to the urban areas.
to answer the second question, the revaluation should be gradual to ensure that market forces have a chance to respond intelligently to the appropriate change and transform business practices be affected components. In response to the last question, floating RMB would cause to strengthen relative to the other basket of exchange rates, we are currently undervalued due to market manipulation on behalf of the Chinese officials.
The last two questions refer to different rates, and ask which is the best in China. Six major exchange rate system. The first consultation is not a separate legal tender exchange system. In this system, the currency of another country circulates as legal tender, or the member belongs to a cash or currency union in which the same legal tender is shared by the members of the union. By adopting the system includes a full waiver of the monetary authorities' under independent control over domestic monetary policy. The second system is replaced with clear legal commitment under the so-called currency board. It is a monetary system, domestic currency limit with a fixed rate of a particular currency for completion by the issuing authority ensuring legal obligations. some flexibility may be allowed, depending on how tight bank rules a currency board. the third system is the other conventional fixed peg arrangement.
countries that adopt this system to fix the currency at a fixed price in another currency or a basket of currencies. the basket of currencies is produced in significant commercial or financial partners and weights reflect the geographical distribution of trade, services and movement of capital. There is a limited degree of monetary policy discretion in accordance with, depending on the bandwidth.
China's exchange rate regime adopted by the Fourth of monetary policy, which is known for its slider. We bandwidth around the central rate within the currency, which is fixed at a rate adjusted periodically, or in response to changes in selective quantitative indicators. To maintain the exchange rate within the band set limits of monetary policy depends on the degree of political independence of the bandwidth.
The fifth regime of managed floating exchange rate is no predetermined path. The monetary authority attempts to influence the exchange rate path or goal without a specific exchange rate. Finally, there is the independently floating system, which was adopted by the US, for its official foreign exchange market intervention to reduce the rate of change of the exchange rate set by the market and prevent fluctuations over the exchange rate, rather than the determination level for it. This is the system that must be followed in order by the Chinese government, as defined and can not be manipulated by the market, while the flexibility of monetary policy.
problems with third-party opinion on the matter
This last section discusses the current situation in this dispute. The latest news from sources such as Bloomberg, the Wall Street Journal and the Financial Times, the Chinese economy has experienced due to weakening exports to the US housing slump and global credit crisis. China's GDP growth is expected to decline as well. The Chinese government's options to stimulate the economy and protect exporters. Reports claim that the Chinese central bank officials plan to slow down the appreciation of the RMB. Indeed, this is a decision that should have been done long ago, and it would be a major breakthrough in the ongoing debate that actually reaches the conclusion given the situation in the global economy.
According to Professor Pan Yingli of the Shanghai Jiao Tong University, the RMB was undervalued since the 1997 Asian currency crisis and the financing of such policies used in the import and export sector at the expense of non-trading industries. Basically, adopted by the crawling peg allows China to manipulate exchange rates in its favor, in order to sell more products abroad, export the lifeblood of the Chinese economy.
During the Asian financial crisis on four fundamental issues and questions: (1) the shortage of foreign currency, which is due to currency value and stocks in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, (2) improperly capital-developed financial sector and allocation mechanisms in the troubled Asian economies, (3) the effects of the crisis in both the US and the world, and (4) the role of operations and supply resources to the International Monetary Fund.
In summary, in this case showed how trading partners can be both positively and negatively influence the economic decisions of one or more players. It is important to realize country that we live in an interconnected, increasingly global environment where important decisions are not in isolation. In fact, China has decided to pursue exchange rate reform, for better or worse, a significant impact on billions of people throughout the developed and developing world.