C hina Exchange Rate

1. China Exchange Rate The Road to progress Li Chun Hin 09015574 Sin Shing Him 09018441

2. Definition 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

3. Factors affected by exchange rate • Interest rates • Price level ( Inflation & Deflation) • the state of politics • the economy in every country • Import, Export (NX)

4. 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

5. 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.

6. Trend of the Exchange Rate of China

7. 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.

8. Exchange rate of the American dollar vs. 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.

9. Exchange rate of the American 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 wellexports more competitive • United States requires China to increase the value of RMBincrease import & decrease export

10. Case study Sino-US Trade imbalance.Should China appreciate RMB?

11. Background • In 2003, United States requires China to increase the value of RMB • Reason: • US has a huge trade deficit • To narrow down the trade deficit • Imports from China become more expensive and trade deficit and balance of payments will automatically improve. • Unfair to US worker • US recommend China to appreciate RMB by 40%

12. Response 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.

13. CASE STUDY 1 The trade balance of China

14. The 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.

15. Why US always blame CHINA? Sino-US Trade imbalance

16. Fact of Sino-US Trade imbalance • 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 .

17. Statistic of Sino trade imbalance

18. Statistic of Sino trade 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

19. Cause 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)

20. Causes of trade deficit • NX=(S-I)+(T-G) • Interest rate in US is lowEncourage people borrow $ from the banksI>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

21. Causes 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

22. Causes 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.

23. Thank you!!