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“CHINA’S FOREIGN EXCHANGE PROBLEM”
SUBMITTED TO SUBMITTED BY
Prof. Rammya Aroul Kunal Suri – Trade Competitiveness Sunil Subeydhi – Foreign Reserves
43 billion in 2009. euro and other foreign currencies accounting is huge. but it still faces certain problems with foreign exchange.2%.3 billion in 2010. There is no doubt about the attractive domestic market of China. Though China has surplus foreign reserves. It is being followed by mounting surpluses on both current and capital accounts. few of them are discussed below:1) The will of the market participants is not fulfilled by the supply & demand and follow their compliance with regulations. with a trade total of $ 385. China is also the second largest trade partner of USA. China has been the top five largest exports markets for USA. measured by Gross Domestic Product (GDP) at purchasing power parity (PPP). China started the economic reforms in late 1970s with the introduction of “open door policy” to permit foreign trade and investment. compared with the Hong dollar. USA has a trade surplus with China. four times of what it was in 2001. The focus of making existing products cheaper made it a huge hit in the global business world.INTRODUCTION China is known to be the second largest economy in the world. China’s most successful debut onto the world stage from 1970’s has been because of cheaper labor and lower costs. Its GDP per head was estimated to be $7. yen. 3) The dominance of US dollar dominance. . accounting to $ 7. but its real advantage has been its low wage manufacturing labor. It became a part of integrated world economies after joining WTO in 2001. 2) A clear excess supply is there on the foreign exchange market in recent years.518 in 2010 with a growth rate of 9.
China’s competitive manufacturing sector is expanding with increasing exports and gaining the global market share while its domestic economy is growing with increasing imports. But with the intense global competition. though China’s prices are comparatively rising slowly as compared to all other economies. There are two major issues in recent economic development of China:- . As per June 10. its competitive strategies. and intellectual property piracy are some of the biggest concerns in western world. Open door policy for foreign trade and investment. Trade links with all major countries in the world. which includes:1) 2) 3) 4) 5) Cheap labor & lower costs. So.COMPARATIVE ADVANTAGE IN TRADE COMPETITIVENESS China’ trade competitiveness has been mainly because of few factors. currency manipulation. As per the experts. mainly USA. it is a wrong inference as the cost of raw material is rising everywhere in the world. it can be inferred that China’s competitiveness is still improving but at a slower rate than what it was before. China utilizes its various competitive advantages in an attempt to make the most of the upcoming world order. Whatever China does to become a superpower of the new world. people argue that China is losing the competitive edge because of the rising export prices. the US trade deficit was $ 50 billion. The trade deficit between China and US was known to be “the largest imbalance with any country”. Pegging of Yuan with US $. Attractive domestic market. which in turn is increasing the costs everywhere.
to a new band of +/. the central bank is taking all these steps instead of a one. is good for the United States. with solid indications that further revaluations can be made on a regular basis. which in turn. China pegs its currency to the U. The Chinese government rejected all the . it means that the partner is trying to manipulate the exchange rate in order to gain an unfair competitive advantage. Yuan is gaining the ground against the falling $ ( appreciating). though it is depreciating against Euro and the Yen in last 2 months.3931. China revaluated it’s currency against the dollar and hit a new record level of 6. which includes $ 31 billion purchases during the first six months of 2002.1) Irregular purchase of dollars for a long time and other currencies that leads to a lower than market based exchange rate of Yuan and a larger than market determined trade surplus. but a band of +/. in order to tackle the inflation and keep the exports sector competitive. A lot of speculations are going on that the central bank of Republic of China is using the Yuan as a tool to fight against the rising inflation which was around 6 % as of Sep 2011.4 billion as per June 2010. As per International Monetary fund (IMF).3991. China has worked on building a functioning foreign exchange market. In Sep 2005.3% remained for the US dollar. The World Bank benchmark is that a country should maintain reserves equal to at least 25% of its annual imports.197 billion as of June 2011. Since the revaluation happened. There are questions about quantitative easing and very low interest rates in United States. and which is only one sided intervention. which can become a factor of capital flooding from US to China but experts say. if a trading partner of USA makes prolonged purchase of $ and other currencies. 2) Manipulation of the currency to gain unfair competitive advantage.3% against the yen and the euro.off appreciation of renminbi. China has treasury holdings of $868. much higher in percentage than its imports. China doubled the renminbi’s daily trading bands against non-US $ currencies. Though in China’s case. it is $ 3. dollar at about 6. The question further deepens when it comes to adequacy of reserve holdings of China. In second case.0.S.
Another Scholar Xia Bin.charttype=line.crosshair=on.ohlcvalues=0.range=3m.logscale=off. there is a consensus that an appreciation of the Chinese currency would make the Chinese goods expensive in US and will make US goods cheaper in China.i ndicator=volume.com/echarts?s=USDCNY=X+Interactive#chart4:symbol=usdcny=x. . during the financial crisis. asserts that the US deficit is because of the faulty economic structure of US and not because of China’s Yuan value. American manufactures calls it a way of China to gain advantage as a export led economy and the undervaluation which acts as an unfair subsidy to Chinese goods.yahoo. rather than surplus. which in turn will decrease the US trade deficit with China and will increase exports and thus create more jobs in US. Sourcehttp://finance.allegations of currency manipulation and is of the view that this step will benefit the world at large. Joseph Stiglitz says that United States action to force China to appreciate Yuan is not a good idea as it can shake the foundation of the world economic recovery.source=undefined There are mixed reactions on this issue from all over the world including Americans and experts in this field. They said that they are working for the goal of trade balance. But overall.
The global market is leaded by US. It has consistent growth rate of 10% over the past 30 years and it’s also the largest exporter and ranks second in Imports. Gold and IMF reserves are also included in the foreign currencies reserves. so every other countries foreign currencies reserves are dominated by US $ with a higher percentage (67%).com/channel/life/forex-reserve-of-india-top-10-countries-with-largest- foreign-exchange-reserves-509751 China ranks second in the global economy in terms of size and it has been the fastest growing economy. RANK 1 2 3 4 5 *Sources: COUNTRY China Japan Russia Taiwan India USD Trillion $ 2. Pound. usually the one which are traded globally which comprises of US$. Similarly every country built foreign currency reserves in forms of bonds.FOREIGN CURRENCY RESERVES OF CHINA Financial reserves are usually the surplus fund built on years and years for future contingency issues. Euro and Yen. Reserves are not only done at organization level but also day to day life of human being. Every other country sources their products from China and is looking to .yahoo.019 Billion $ 401 Billion $ 305 Billion $ 262 http://shine. There are few currencies which are kept in foreign currencies reserves. stocks and foreign currencies this are usually kept for future.132 Trillion $ 1. The Foreign currency reserves are also known as Forex reserves and these are only held by Central bank and Monetary authorities. To understand more clearly let us have a look on top 5 countries with maximum foreign currencies reserves.
4.com/2009/03/31/china-yuan-dollar-markets-currency-pegging-g20. Increase in exports lead to appreciation of Yuan and that . The stabilized currency exchange has benefited competitive exports with any other countries and they have generated huge revenue through their exports to US.5% since 2005. There are many reason for same. The pegging of Yuan and mass production with better infrastructure and technology has made China such a strong economy. Infrastructure.org/2011/05/the-diminished-case-for-chinese-yuan appreciation.2 to 8.forexblog.4 and then after G20 summit it was appreciated and it came in the range of 6.establish their manufacturing plant in China. http://www.forbes.html Graph: http://www. Until 2005 the currency was in a band of Yuan 8. the currency got an appreciation of around 27. Around two third of their reserves were US $. The pegged currency helped China to increase their reserves in Short term. The graph below puts more light on same. such as Cheap labors.html During this period China continued buying more and more US bonds and treasuries to increase their reserves. Technology and one of the reason is Chinese Yuan pegged to US $. China had pegged their currencies with US$ and that has stabilize Yuan in their market.
There was also economic meltdown in US in the year 2007.39797 and with the current downfall in European market. The Chinese investment in US also indicates that a large amount of foreign currency is still interdependent on both the countries. .com/investments/is-the-euro-the-next-global-currency The current scenario reveals Yuan is still pegged and the current value for 1 $ is Yuan 6. which was a big time problem for China as they were holding maximum US reserves. http://www. They started joint venture in Interstate Hotels. There were also points raised towards pegging and limiting China for Foreign reserves.degrade their reserves. If there is downfall in US dollar value or appreciation of Yuan will affect a large percent in their reserves. The biggest announcement was China buys 15. the Euro currency took a boom and was slowly acquiring position in the market as a global trading currency.8% stake in AES Power Company. So to overcome this China started investing in US markets. it seems US $ will continue dominate the market. http://www.moneyweek.reuters.com/article/2011/09/20/china-us-treasuries-idUSL3E7KK02420110920 In 2005.
It includes appreciating the Yuan against the US $. when European markets came into a problem. like prolonged purchase of $ and manipulation of Yuan etc. But foreign exchange with its advantages also created certain problems for China because of its economic model. what was being used for western world earlier is being used for China now. which in turn will decrease US trade deficits. which is becoming a center of concern for the Central bank. China also used pegging with US $ as a tool to increase its export sector trade competitiveness. which it calls is good for the world during this period of recession. the whole world gets the cold.CONCLUSION As discussed in the paper above. The way they maximized the benefits by introducing “open door policy” earned them foreign exchange surplus and GDP growth of 10% for almost a decade. Chinese government is sure about the steps it is taking. China’s cheap labor and lower costs became one of the most important reasons behind its success on world economic platform. China got mixed reactions from the world on this but it is using its foreign exchange reserves to maintain the GDP growth by investing in Euro when US was in recession but again started pegging with US $. . It is taking various steps. that whenever China sneezes. China is maintaining its surplus by investing in various states in USA and by mainly buying T bills of Federal government. In all. which will decrease the rising inflation in the country. China’s economic growth is slowing with increasing inflation.
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