Since 2002, China‘s rapid growth and the trend of globalization have forced China to face its currency‘s regime development. Although Chinese central bank in 2005 announced to adjust its regime towards basket policy, Yuan has been pegged to USD while maintained undervalu-ation and trade surplus in the following years, which led to global criticism and pressure to revalue. Under such circumstance, the discussion around Yuan has shifted towards whether Chinese currency regime should be more flexible, abandoning the old argument that how much Yuan should revalue.
This essay provides a study regarding the future of RMB, based on analysis of Yuan‘s development before and after entering WTO, and the pros and cons of Yuan‘s regime during China‘s development. Also, this article also draws insights from the development of capital export and restriction, high saving rate and huge foreign reserves. Based on the analysis, the article reaches the conclusion: considering the huge negative impact on China‘s economy should Yuan revaluate, it is not realistic to expect Yuan to raise sharply in the near future; if China is to allow Yuan to revalue, the most possible course of action is to implement some extra financial polices to reduce the impact.
Contents
1. Introduction
2. Literature Review
2.1 De Jure Classification and De Facto Classification
2.2 Exchange Rate Regimes: Classification and Characteristics
3. Historical Development of the Chinese Exchange Rate Regime before Joining the WTO
3. 1 A Fixed Exchange Rate with the Unilateral RMB Peg to the U.S. Dollar
3.1.1 A Brief History of Chinese Currency Exchange Regime
3.1.2 The Pros and Cons of Chinese Currency Exchange Policy
3.2 China's Exports of Capital and Capital Account Controls before Joining the WTO
3.2.1 The Capital Exports of China before Entering WTO
3.2.2 The Capital Control Strategy of China before Entering WTO
3.3 Overvaluation and Undervaluation of RMB
4. More Developments of RMB‘s Exchange Rate Regime after Joining the WTO
4.1 The Change in Chinese Exchange Rate Regime after Entering WTO
4.2 The Status Quo of China's Capital Account Liberalization
4.2.1 Capital Management Policy of China after Entering WTO
4.2.2 The Reason behind China's Capital Restriction
4.3 China‘s high Saving Rate and Large Foreign Reserves
4.3.1 High Saving Rate: China‘s Modern Characteristic
4.3.2 China‘s Foreign Reserve
4.4 The Goal and Strategy of RMB
4.4.1 The Goal of Chinese Exchange Regime
4.4.2 Should Yuan Revaluate?
4.4.3 RMB's Strategy
5. Conclusion
Research Objectives and Core Themes
This paper examines the evolution of China's exchange rate regime following its accession to the World Trade Organization (WTO) in 2001. It aims to analyze the factors influencing China’s currency policy, including capital controls, high savings rates, and foreign exchange reserves, to reach a reasoned conclusion regarding the future trajectory and potential adjustment strategies for the Renminbi (RMB) exchange rate.
- The historical development and structural shifts in China's exchange rate policy.
- The impact of capital account liberalization and strict capital controls on economic stability.
- The debate surrounding the undervaluation of the RMB and its effects on international trade balances.
- The role of foreign reserves and high domestic savings in shaping China’s monetary strategy.
Excerpt from the Book
3.1.2 The Pros and Cons of Chinese Currency Exchange Policy
China has adopted the de facto peg to the dollar exchange policy for its currency, Renminbi, since 1994. The policy reflects the unique situation of Chinese financial climate and has its merits as follows:
1. US dollar is one of the leading currencies in international trade and investment, and this is particularly true for China. Maintaining a fixed exchange rate to the dollar facilitates exporting and importing between Chinese and foreign economy entities by reducing the innate risk from foreign currency exchange.
2. Since the majority of properties held by Chinese finance departments and its citizens are measured in USD, a more flexible exchange policy will inevitably mean increased risk to Chinese assets. If a “Currency Basket” policy were in place, for instance, RMB’s rate to USD would have to change when a fluctuation occurs between US dollar and Euro or Japanese Yen rates. This carries exchange risks to the Chinese US dollar assets even though the value of the asset in US dollar did not change, while its value in RMB after the exchange was altered.
3. All of countries in East Asia except Japan implement a similar dollar peg exchange policy. It is true that some of the countries gave up this policy after the Southeast Asia Financial Crisis, but they have gradually resumed the fixed rate policy while their national economies recover from the crisis (see McKinnon and Schnabl, 2004b p.2). It is arguable that, by adopting this same policy, the US dollar serves as a stabilizing force between Chinese and the East Asia economies in this case, not to mention the effect on preventing competitive currency depreciation.
Chapter Summary
1. Introduction: Outlines the historical context of China's entry into the WTO and the subsequent global pressure to evaluate and revalue its currency regime.
2. Literature Review: Reviews academic classifications of exchange rate regimes, distinguishing between de jure and de facto policies and introducing key concepts like "fear of floating".
3. Historical Development of the Chinese Exchange Rate Regime before Joining the WTO: Analyzes the pre-WTO period, focusing on the unilateral peg to the U.S. dollar, capital controls, and debates over RMB undervaluation.
4. More Developments of RMB‘s Exchange Rate Regime after Joining the WTO: Discusses post-WTO adjustments, capital account liberalization, high savings rates, and the strategic goal of balancing growth with stability.
5. Conclusion: Synthesizes the analysis, arguing that China should transition toward a more flexible exchange rate to maintain long-term internal and external economic balance.
Keywords
China's Exchange Rate Regime, RMB's undervaluation, capital controls, foreign exchange reserves, high savings rate, Yuan's revaluation, WTO, nominal anchor, currency peg, economic growth, capital account liberalization, financial stability, trade surplus, de facto classification, incrementalism.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on the development of the Renminbi's (RMB) exchange rate regime and the strategic policy choices China has made following its accession to the WTO.
What are the central themes discussed in the work?
Key themes include capital account controls, the impact of high foreign exchange reserves, the "fear of floating" phenomenon, and the arguments for and against a rapid revaluation of the Yuan.
What is the main research question?
The core inquiry explores how China will adjust its exchange rate policy in the future, considering the structural challenges of its economy and global pressure for a more flexible currency.
Which scientific methodology is employed?
The study utilizes a comparative analysis of historical exchange rate regimes, reviews empirical economic literature, and incorporates data regarding capital account components and foreign reserve trends.
What topics are covered in the main section?
The main sections cover the historical stages of the Chinese exchange rate regime, the specific methods of capital control, the debate on RMB undervaluation, and the impact of potential appreciation on various Chinese industries.
Which keywords best characterize the work?
Key terms include China's Exchange Rate Regime, RMB undervaluation, capital controls, foreign exchange reserves, and Yuan's revaluation.
Why does the author argue against a "rapid" revaluation of the Yuan?
The author argues that a rapid revaluation could lead to economic instability, potential recession in manufacturing, and increased unemployment, especially given the current lack of a fully mature financial system.
What is the significance of the "Impossible Trinity" in this context?
The "Impossible Trinity" is used to explain China's dilemma in trying to balance free capital flow, a fixed exchange rate, and an independent monetary policy, which serves as a theoretical basis for China's continued strict capital controls.
- Quote paper
- Long Yuan (Author), 2010, Further Development of Renminbi's Exchange Rate Regime after Joining the WTO, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/165078
