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19. In the last quarter century, Chinese Yuan exchange has gone through different phases.

How would you classify these phases?


Why do you think Yuan might have gone through these phases?

Historically, the Chinese Yuan reached an all-time high of 8.73 in January of 1994 and a record low of 1.53 in
January of 1981. The currency has gone through different phases leading up to now. in the years 1979-80, the
official exchange rate was roughly 1.5 yuan per US dollar. The rate could not cover the costs of exports, as the
average cost of earning one US dollar was around 2.5 yuan. A dual rate system was adopted at the beginning of
1981. Commodity trade was settled at the internal rate of 2.8 yuan per dollar; the official rate of 1.53 yuan per
dollar continued to apply to non-commodity transactions. After 1985, the yuan was gradually devalued.
Moreover, the proportion of retained foreign exchange, which was introduced in 1979, was gradually raised, and
enterprises were allowed to swap their foreign exchange entitlement with other enterprises through the Bank of
China at rates higher than the official exchange rate. Restrictions on trading foreign exchanges were further
relaxed with the establishment of a "foreign exchange adjustment center" in Shenzhen in 1985, in which
enterprises could trade foreign exchanges at negotiated rates. By the late 1980s, such centers were established in
most provinces in China and more than 80 percent of the foreign exchange earnings was swapped in such centers.
The climax of foreign exchange rate policy reform was the establishment of a managed floating system and
unification of the dual rate system on January 1, 1994, by that time 80 percent of foreign exchanges has already
been allocated through the swap markets. In the recent events China shocked the economy by devaluing its
currency for three consecutive days from 11th to 13th of August 2015. The Peoples Bank of China had been
keeping the Yuan strong to support the governments goal of shifting economic growth from being export-driven
to increasing domestic demand. But low economy made it go back to export driven income through boosting
exports.

The reason behind the Yuan exchange is the fast-economic growth through export and the exchange rate regime
it follows. Indeed, China fast growth which brought the expansion of GDP seven-fold over last 25 years, or
about four-fold in terms of real GDP per capita. Chinas share in the global GDP had risen about two-and-a half-
fold during last 15 years, from 5.4 per cent in 1989 to over 12 percent in 2004. Chinas economic strength follows
a quarter century of growth at an annual average of 9-10 per cent, some three times higher than the average rate
of its trading partners. China is a global hub for manufacturing, and is the largest manufacturing economy in the
world as well as the largest exporter of goods in the world. China is also the world's fastest growing consumer
market and second largest importer of goods in the world. China is a net importer of services products. As of
2016, China is the second largest trading nation in the world and plays a prominent role in international trade, and
has increasingly engaged in trade organizations and treaties in recent years. In China, the bank determines the
Yuans exchange rate based on its own basket of foreign currencies, which economists tend to believe, is primarily
made up of the U.S. dollar. Generally, the central bank allows the Yuan to move two per cent above or below the
rate it sets for that day, which it calls the daily fixing. China follows a crawling peg, which is a system of exchange
rate adjustment in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The
par value of the stated currency is also adjusted frequently due to market factors such as inflation. This gradual
shift of the currencys par value is done as an alternative to a sudden and significant devaluation of the currency.
China have gone through devaluation to boost export and the currency has been manipulated through the years in
the past quarter century.

Thus Yuan exchange fluctuations in the past quarter century when it went through fixed rate of 1.53 to dual rate
to managed floating or crawling peg, can be credited to the exchange rate regime it follows and manufacturing
and export driven fast growing economy.