Exchange Risk Of China Essay

4879 words - 20 pages

CHAPTER 1 INTRODUCTION
1.1 BACKGROUND OF THE COUNTRY
The Socialist market economy of People's Republic of China is the world's second largest economy by nominal GDP and by purchasing power parity after the United States. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. As China's economic importance has grown, so has attention to the structure and health of the economy.
The Renminbi (RMB, sign: ¥; code: CNY) is the official currency of the People's Republic of China. Renminbi is legal tender in mainland China, but not in Hong Kong, Taiwan, or ...view middle of the document...

27 Yuan per USD from 1997 to 2005.

1.2.1 De-pegged from the U.S. dollar
On July 21, 2005, the peg was finally lifted, which saw an immediate one-off RMB revaluation to 8.11 per USD. The exchange rate against the euro stood at 10.07060 Yuan per Euro.
However the peg was reinstituted unofficially when the financial crisis hit: "Under intense pressure from Washington, China took small steps to allow its currency to strengthen for three years starting in July 2005. But China 'repegged' its currency to the dollar as the financial crisis intensified in July 2008.
On June 19, 2010, the People’s Bank of China released a statement simultaneously in Chinese and English indicating that they would "proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility." The news was greeted with praise by world leaders including Barack Obama, Nicolas Sarkozy and Stephen Harper. The PBoC maintained there would be no "large swings" in the currency. The RMB rose to its highest level in five years and markets worldwide surged on Monday, June 21 following China's announcement.
1.2.2 Managed float
The RMB is now moved to a managed floating exchange rate based on market supply and demand with reference to a basket of foreign currencies. The daily trading price of the U.S. dollar against the RMB in the inter-bank foreign exchange market would be allowed to float within a narrow band of 0.3% around the central parity published by the People's Bank of China; in a later announcement published on May 18, 2007, the band was extended to 0.5%. On April 14, 2012, the band was extended to 1.0%. China has stated that the basket is dominated by the United States Dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar.
Beginning in January 2010, Chinese and non-Chinese citizens have an annual exchange limit of a maximum of 50,000 USD. Exchange will only proceed if the applicant appears in person at the relevant bank and presents his passport or his Chinese ID; these deals are being centrally registered. The maximum withdrawal is 10,000 USD per day, the maximum purchase limit of USD is 500 per day. This stringent management of the currency leads to a bottled-up demand for exchange in both directions. It is viewed as a major tool to keep the currency peg, preventing inflows of 'hot money'.
A shift of Chinese reserves into the currencies of their other trading partners has caused these nations to shift more of their reserves into dollars, leading to no great change in the value of the Renminbi against the dollar.
In May 2013, the Yuan reached a record high rate of 6.1276 to the U.S. dollar during intra-day trading Chinese leadership has been raising the Yuan to tame inflation; a step U.S. official have pushed for years to help repair the massive trade deficit with China. On March 8, 2013, earlier the...

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