Chinese Currency Jigar

8/3/2019 Chinese Currency Jigar

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Chinese money is called Renminbi (RMB) means

"The People's Currency".

The popular unit of RMB is yuan

1 yuan equals 10 jiao,

1 jiao equals 10 fen.

There are parts of China where the yuan is also known

as Kuai and Jiao is known as mao.

Chinese currency is issued in the following denominations:

one, two, five, ten, twenty, fifty and one hundred yuan; one, two and five jiao;

and one, two and five fen.

The official exchange rate between U.S. dollar and

Renminbi yuan currently is about 1:6.8(1 US dollar = 5.66 yuanRMB)


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Meaning Devaluation decreasing the value

of one nation's currency relativeto gold or the currencies of othernations.

Meaning Revaluation increasing the value

of one nation's currency relativeto gold or the currencies of othernations.


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CHINA DEVALUES ITS CURRENCY


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Dec 1948

People Republic of

ChinaIntroduced RMB

1955

1$=2.46 YAUN197279

1.50 YAUN

1981

YAUN Devalued

2.80

1983

PROC

Commercial BK

Central Bk

1985

Entered into SWAPmarket (Dual

pricing)

27 Dec 1985

China Join IMF

1986

Devalued

3.45 YAUN

1993

Devalued

5.76 YAUN

1994(8.62)

Forex Exchangetrading Center

End of Dual Pricing

19972005

Pegged$8.27 YAUN

Join WTO

2005

End of PEG

Revalued 2.1%

8.11 YAUN

2006

Pressue fm US ,incresase Tariff if

not Revalued

962010

5.66 YAUN


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Buy Huge amount

of $

Increase in Demand

of Dollar (D>S)

Supply of YAUN

Increase in Supply

of RMB (S>D)

Increase in Dollar

Price

Price of YAUN goes

Down


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China Buys Dollar >Trade Surplus.

China Sell Bond to LocalInvestor (4 %)

Bond money used forPurchase of U.S Treasury

Bond (2 %)

In Process China makeloss of 2 %

Because of this LossChina sustain

devaluation of Yaun

Even China has argued thattheir economy is not doingwell because of thecontinuous loss made.

China Feels that this loss isa small amount, forcreating Jobs and givingboost to Exports.

U.S. has not been able topressurize China to a greatextent , because of help bychina for Budget Deficit.


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by encouraging banks to make loans to

exportoriented companies.

Ministry of Foreign Trade and Economic Cooperation issues

more export licenses for base metals.

Exporters will receive full 17% subsidiaries.

In China, Loans taken by Financially week companies gets

written off by the banks


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China pegged itscurrency at 8.23

yuan for 10

years

US pressure onChina

2005, End of peg, Revalued 2.1%,

yuan 8.11 to

dollar

2006 , Pressure

from US ,Increase Tarriffif not Revalued

Dollar PriceDecrease, due tomkt cricis

Reverse impacton chinacurrency


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Revalue

Decrease inDeficit

Company

Interest Rate

Economic

Growth

Devalue

People

Chinas Export to US

Chinas Import from US

0.2124 trillion0.07272

trillion

US Trade

Deficit =0.13968

trillion

Reserves $2.40trillion


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Not prepared well:

global economicimbalances and

uncertainties;

large amount of cross

border capital flows

Economy will get

affected


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0 2 4 6 8 10

12

1979.01

1980.01

1981.01

1982.01

1983.01

1984.01

1985.01

1986.01

1987.01

1988.01

1989.01

1990.01

1991.01

1992.01

1993.01

1994.01

1995.01

1996.01

1997.01

1998.01

1999.01

2000.01

2001 01

In

t.transactionrate

Officialrate

Swa

pmarketrate

1979

,FXretentionsystem

1994

un

ifiedwith

D

ualrate


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1980s, a fixed exchange rate system plus frequent RMBdevaluation

19881993, a dual exchange rate system: official fixed

exchange rate coexisted with the marketdeterminedrate in the swap centers

The swap market rate depreciated sharply in the early1990s

1994, the official rate was devalued and unified with theexchange rate at the swap centers;

1995, a de jure managed floating exchange rate systemalthough the currency has been de facto fixed to $

2004(21 July): Managed floating


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Currency pegs are not terribly successful during toughtimes

You cant maintain a depreciating currency forever

and markets know this!

A peg forces you to follow policies that tend tomake economic conditions worse (tight money,balanced government budgets)


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Short Run Management

Evolution of Foreign Exchange Rate System

Why not immediate float of RMB.

US Pressurizes China

Revaluation of RMBIncreased RMB value by 2.1%

Chinas strategy to increase RMBEase Export credits Relax Export licenses Increased Subsidies

How China sustained devalued YUAN

How China devalued RMBBought dollars to increase value of dollar price Increased Supply of YUAN to decrease value of YUAN

TimelineExplains various stages of RMB right from 1948 till 2010

Definition of Devaluation and Revaluation

Introduction to chinese currency (RMB or YUAN)


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Documents

Chinese Currency Jigar