China Exchange Rate

The Road to progress

Li Chun Hin 09015574Sin Shing Him 09018441

Definition of Exchange RatesDefinition of Exchange Rates

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.

the higher the exchange rate for one RMB in terms of one HKD, the lower the relative value of the HKD.

An appreciation of a currency implies a depreciation of another currency

FFactors affected by exchange rateactors affected by exchange rate

Interest rates

Price level ( Inflation & Deflation)

the state of politics

the economy in every country

Import, Export (NX)

History of RMB(Before 1994)History of RMB(Before 1994)

The renminbi was first issued before the takeover of the mainland by the Communists in 1949.

The purpose of issuing RMB is to end the hyperinflation

During the era of the command economy, the value of the RMB was set to unrealistic values in exchange with western currency

History of RMB( Before 1994)History of RMB( Before 1994)

With the opening of the mainland Chinese economy, a dual track currency system was instituted, with renminbi usable only domestically, and with foreigners forced to use foreign exchange certificate

The unrealistic levels at which exchange rates were pegged led to a strong black market in currency transactions.

In the late 1980s and early 1990s, levels and the dual track currency system was abolished.

Trend of the Exchange Rate of ChinaTrend of the Exchange Rate of China

History of RMB( After 1994)History of RMB( After 1994)

In 1994, China reformed its double-track exchange rate system and introduced the unification of exchange rates. After the unification, China instituted a managed floating exchange rate regime based on market supply and demand.

Exchange rate of the American dollar vs. Exchange rate of the American dollar vs. China‘s Currency (Renminbi)China‘s Currency (Renminbi)

From 1994 until July 2005, the policy on currency has been to peg informally the value of the renminbi against the value of the United States dollar.

This policy was praised during the Asian financial crisis of 1998 as it prevented a round of competitive devaluations.

Exchange rate of the American Exchange rate of the American dollar vs. China‘s Currency (Renminbi)dollar vs. China‘s Currency (Renminbi)

In 2003, this policy came under criticism by the United States.

The value of USD falls The value of RMB falls as wellexports more competitive

United States requires China to increase the value of RMBincrease import & decrease export

Case studyCase study

Sino-US Trade imbalance.Sino-US Trade imbalance.Should China appreciate RMB?Should China appreciate RMB?

BackgroundBackground

In 2003, United States requires China to increase the value of RMB

Reason:1. US has a huge trade deficit2. To narrow down the trade deficit3. Imports from China become more expensive and

trade deficit and balance of payments will automatically improve.

4. Unfair to US worker US recommend China to appreciate RMB by 40%

Response of ChinaResponse of China

China did not appreciate RMB by 40% changes its exchange rate system to managed

floating system in 2005. appreciated by over 20 % against the US dollar from 2005 to

2009. China further deepened the reform of the yuan

exchange rate mechanism in July 2005. China's trade surplus against the United States

has still increased by a large margin during the period of time.

The trade balance of ChinaThe trade balance of ChinaCASE STUDY 1CASE STUDY 1

The trade balance of ChinaThe trade balance of China

Over 80% of the surplus came from US and Europe.

Has a big deficit between Asian countries(e.g. Tai Wan ,Korea )

China's trade surplus against the United States has still increased although China has already appreciated RMB.

Why US always blame Why US always blame CHINA?CHINA?

Sino-US Trade imbalanceSino-US Trade imbalance

Fact of Sino-US Trade Fact of Sino-US Trade imbalanceimbalance

US did not consider the value-added of the goods

Example 1

China is exporting a car which worth USD 10000. The actual domestic valued-added is only USD 2000.

We should only calculate USD 2000 as the trade surplus .

Statistic of Sino trade Statistic of Sino trade imbalance imbalance

Statistic of Sino trade Statistic of Sino trade imbalance imbalance

China to the US: value-added is about 38% The US to China: value-added is 87.3% (They

produce high-tech products)

After making adjustment, the true trades deficit of the US to China in 2005 is only US$ 39.6 billion

A great contrast to the US$201 billion recorded by the US

China only gain as little as they cannot imagine

Cause of Trade deficitCause of Trade deficit

In the national income accounting, we can have some to prove that.

income= expenditure Y=C+I+G+NX ------(1) Y=C+S+T ------(2) Combine (1) + (2) C+I+G+NX=C+S+T NX=(S-I)+(T-G)

Causes of trade deficitCauses of trade deficit NX=(S-I)+(T-G)

Interest rate in US is lowEncourage people borrow $ from the banksI>S(S-I) should be negative.

In US, government spend much $ on military and education. Indeed, tax income cannot cover the expediture(T-G) should be negative as well

NX=(negative number)+(negative number) =negative number

Causes of trade deficitCauses of trade deficit

The policy of export control of High-tech product

The US does have competitiveness in high-technologies and value of those products are high

To loosen the export control, trade deficit can be decreased

For example :after 911,US enhance the export control, the trade deficit of high- tech product is increased from 26800million to 37000million from2003-2004

Causes of trade deficitCauses of trade deficit

Most of the goods imported from China is necessities.

The elasticity is rather low. If China appreciate RMB, The trade deficit of the US will be even

larger than now.

Thank you!!