TheChinese economy looms largely on the economic stage of the globaltrade and the policies surrounding the economic determinant variablesare from the daily debate in the economic circles. The opening of theChinese international trade and the Chinese Yuan as the officialcurrency in 1978 opened doors for the foreign trade between China andother nations. The opening allowed for the capital influx sparking arapid economic growth that saw the nation grow tremendously to becomesecond largest growing economy in the whole world. The commencing ofthe foreign trade enabled the adoption of the Chinese Yuan exchangerates by the various governments and financial organizationsinternationally.
Theovervaluation of the Chinese Yuan deliberately initiated the increaseof the governments’ import of the machinery at the time thatimproved the development of the country. The exchange rate at thePeople’s Bank of China (PBC) allowed the exchange of the currencyat the time giving way to extensive economic growth (Basher, Haug &Sadorsky, 2012). However, the intrusion of China in internationaltrade and the foreign exchange experiences advance challenges andbenefits at the same time.
Thehistory of the Chinese Foreign Exchange runs back in the 1970s withthe realization of the Chinese currency Chinese Yuan and thedevelopment of the People’s Bank of China. This bank served as themain banking institution at the time with the foreign exchangebeginning in China. The introduction of the ‘internal settlementrate’ between the Chinese currency and the U.S dollar in 1981applied to all transactions allowing for an increased trading groundfor the economies involved. Government transactions could now becarried out in a better system and the retained foreign retainingsale availed. Various changes had occurred in the exchange rates overthe time, especially in the mid-1990s when the exchange shifted tothe demand and the supply effect of the foreign exchange as argued bySubramanian, (2011). The dual exchange abandonment followed theadoption of the demand and supply to control the relative exchangerate.
Themarket unification and the official launch of the exchange rates inthe mid-1990s helped the banks in China to have controls on thecurrent account. The switching of the Chinese Yuan to a managed floatwithin some currencies was an advantage to the economy of China. Thecurrency gradually appreciated following the complete convertibilityto a current account between 1994 and 2001. The appreciation of thecurrent account helped in the resistance of depreciation, especiallyin the Asian region. The currency received praise for maintainingstability in the region during a time the region was experiencinghard economic times.
Thetremendous growth of the Chinese exchange rates helped thestabilization of the renminbi (RMB) in the foreign exchange spectrum.The drifts in foreign exchange in the Asian and the Chinese regionhelped the growth and stabilization of the renminbi (RMB) and theadoption by international financial organizations like the World Bankand the International Monetary Fund. Government organizationsadditionally the rise in the Gross Domestic Product in China assistedin the adoption of the currency (Asian Development Bank, 2007).However, amidst the growth of the economy and the penetration of therenminbi (RMB) in foreign trade some challenges were experiencedespecially by the devaluation of the currency.
TheChinese renminbi (RMB) devaluation in mid-2000 threatened theexchange rate in the foreign economy. The devaluation of the currencyaffected the world business in general from investors to thepartnering nations. The effect of the renminbi (RMB) devaluation inthe African nations expected to have better trading powers byfocusing on the East in abandoning the dollar effect. Most of theAfrican countries affected by the devaluation have translated theeffect into the weakening of their own local currencies. The largesteconomy and the consumer of various raw products from the UnitedStates slow the economy by the devaluation move affecting theinternational trade by a margin. The devaluation of the Yuan has amore economic effect than the nation may realize.
Additionally,the devaluation of the Chinese renminbi, drugs down the retailersfrom the United States and the land miners as China forms the largestmetal consumer in the region hence affecting the trade. Thedifference between the imports and exports that mainly affects theshares and the trade on luxury goods purchase also has a negativeeffect on the shares. Devaluation of the Yuan makes the prices of thedollar-priced commodities becomes more expensive hence affecting thedemand and supply chain in the international trade.
However,despite the rise and fall of the economic demand, some of the Chinesepartners have a positive impact on the devaluation such as Brazil.The hard economic situation currently experienced by the Chinesemajor partner would help elevate the exports and value for theircommodities in comparison to those imported from China would differin value. The Brazil economy benefits from the devaluation of theChinese Yuan hence it`s coming into loggerheads with the Indianpartnership in the international trade environment. The Yuandevaluation has both the positive and the negative impacts on theinternational trade partners hence the impact on the foreign exchangecharts.
Economiescompetition against each other to elevate export volumes and pricevalue affects the war on the foreign exchange gainers and losers. Theimpact of the Chinese imports, especially from the Southern America,is among the affected sectors in the economy in consideration thatthe major crude products are from the region hence affecting theeconomy. The slowing Chinese economy eventually has a negative impacton the production system as well as the weakening of the majoritypartners in the international trade.
Theeffort of the Chinese government authority policy was making processpromoting the international use of the renminbi (RMB) it haschanneling of the enterprises funds through the mainland China andHong Kong. Growth in the use of the bonds in the region has been oneof the policies that pool more investors to invest in the regionfollowing the onshore interbank market and the shares business in theregion. The economic stability and the ability of the Chinesegovernment to harmonize the economy being among the top debatablesubjects the challenges to stabilize the economic andsocial-political effects still affect the region.
Theundervaluation of the RMB heated debate following the concerns of theinvolved stakeholders and the effect to the rest of the trading zonesespecially the West. The undervaluation extent that is dependent ontime, theoretical frameworks, exchange rate definition and data aresome of the factors considered the cause the debate. Despite thenegative view of the currency as a manipulator especially in theUnited States, the International Monetary Fund organization finds thecurrency just okay for the foreign exchange market. In the debate,the devaluation of the RMB makes the Chinese products appear to below priced in the market hence affecting the entire distribution inthe international market.
Thedifference between the rising surplus of the Chinese current accountand the significant rising of the American rise of the currentaccount deficit has been the center of focus for many organizations.The population influx from the East Asian countries into Chinaincreased the productivity and the growth of the economy. Thedevaluation of the RMB enabled the higher savings rate and theincrease in the relocation of the industries resulting from thefavorable policy making. The rising questionable debates of therising RMB in saving the United States, among other countries fromthe rising current account deficit making the currency relevant tothe foreign exchange.
Thefast growth of the Chinese economy attributed to the rise in theexport of the business products attributed to the rise in theexports. The largest exporter in 2013 attracted the majority ofcountries, especially those from Africa into entering into apartnership. Taking the advantage of the utilization of theirinfrastructure and oil, China increased the external businessmanufacturing for the United States and other external nations.Increased exports of the low-cost electrical products and themachinery products had a favorable effect on the RMB Hence the effectof the devaluation of the RMB. The increased manufacturing industriesin the region improved the impact of the RMB in the foreign exchange.
Inaccordance to the review by Bems & Johnson, the control of theexport from China in an aim to support the economy has led to a slumpin the export of commodities from the region. Currently, economistsexplain the slowing economy as a result of the devaluation of theChinese Yuan. Additionally, the country’s GDP measure seems to havereached the stronger measures (Bems & Johnson, 2012). However,the global status of the Chinese Yuan are questionable following thedevaluation and the growing economy hence the government explanationson the weakening Chinese Yuan as a global currency measure.
Tobe included in the International Monetary Fund’s Special DrawingRights (SDR) basket of currencies, Beijing has shifted the concerninto strengthening the Yuan rather than focusing on the economy. Thebasket that contains only four currencies gets considered by theChinese financial advisors as the most important priority for theChinese economy. However following the decisions made by the IMFrecently, the IMF thinks otherwise of the Yuan. The currency has astep to make amid the shaky stock markets currently holding thegovernment’s concerns. The central bank realization of theweakening Yuan and the Chinese economy in the recent past has hadeffects on the new monetary policy making regarding the stockmarkets.
Regardingthe Chinese exchange rates and the consideration population effect,the region’s high population increases the purchasing powerlocally. The economy growth to the second largest in the world,however, is attributed to the low standards of living characterizedby culture and political challenges. The low standards of living andthe increase in the manufacturing industries allows for the imbalancebetween the high economic production and a low wage pay for theworkers. Despite the production of cheaper products, the economy ofChina produces cheap labor force following the level of poverty inthe region and low standards of living. Overseas manufacturers arelured into importing not only the cheap products from China but alsooutsourcing of the less expensive labor.
Amongother components that form the Chinese economy that influence theexchange rates, and the stabilizing of the Chinese Yuan include themanufacturing and the oil production especially by the state-ownedcompanies. Through the exportation of the oil, the companies` exportsreturn about 5.0 % of the assets in comparison to the 14% by theprivately owned companies. However, the large population has aneffect on the economy through the cheap labor provision in themachinery manufacturing industries.
Additionally,the growth in technology in China and growth in the population led tothe development of the cities that accommodate the rising population. Infrastructure development and the entrance of China government inthe real estate business strengthen the economy. The increase in theimports and external business expansion in the international marketimproved the economy and the rates of exchange for the Chinese Yuan.According to Rodrik, the shipment of the raw materials into China forthe manufacturing and the low production cost, the economy hasstabilized the effect on the weakening Chinese Yuan (Rodrik, 2014).The effect of the exported labor and the cheap products turns theChinese economy top the largest economic producers.
Despitebeing among the top exporter of the manufactured products, Chinabalances the economy through the importation of copper and aluminumas the main raw materials for the manufacturing industry. The RMAexchange rate improvement with the fixing of the renminbi had apositive impact on the Chinese import and export rates. The nominalexchange rate moved to reflect on the black market prevailing effectsand the economic developments. Among other economic challenges facingthe economy in China the social challenges such as the increase inthe local corruption and the black market, business affects theexchange rate market.
Modelingof the exchange rates dynamics has some challenges especially for thelarge economy such as that of China. The daunting task of the rightmodeling path dynamics has some challenges including the complexityof forces involved. The case of a large economy such as that of Chinapresents the challenges of choice of the right methodology with eachof the applied resulting in different estimates. The determining ofthe equilibrium exchange rate presents the most difficulty among thechallenges involved in determining the exchange rate.
Thecommon methods used in the estimation of the exchange rate in Chinainclude the purchasing power parity (PPP) approach that incorporatesthe impact of relative productivity gains in the tradable andnon-tradable goods sectors. The model specifies the exchange rate asa function of Net Foreign Assets, Relative productivity gains and theopenness of the trade regimes. The above three functions utilizationin the utilization of the purchasing power parity offers differentestimates in the environment. The use of thethree functions in the estimation does not apply the direct measureof the relative production.
Therelative productivity in China measure involves the ratio of thetradable and the non-tradable goods produced in China. According toBown & Crowley review concerning the China exchange rate, theratio between the two factors is relative meaning the price change inthe tradable leads to the similar change in the non-tradable (Bown &Crowley, 2013). Additionally the same effect is realized withbusiness operation between China and partner countries in thebusiness.
Onthe other hand, the Net foreign assets function used in the PPImethodology in the estimation of the China Exchange Rate compares thedebt the country owes the partners in comparison to the tradesurplus. The estimation requires the trading partner to have a highertrade surplus to qualify for the high level of debt servicing that inturn requires a depreciated real exchange rate. The difference of theChinese assets owned domestically and those abroad ratios would behardly determined given the difficulty in the evaluation process(Chen, Milesi-Ferretti & Tressel, 2013). The procedure proves achallenge for the economy given the size and the population inconsideration.
Additionally,the openness of the regime trade function measures the ratio ofimports and exports about the GDP. The neoclassical methods thatanalyze the growth of trade and the effect of the trade openness havebeen the center of concern for many scholars and policy makers. Theestimates plotting following the values estimated give theMedium-Term path of the real exchange rates.
Theestimation analysis following the economy in China in theinternational trade evaluates the effects of the Chinese Yuanappreciation. As many policymakers would expect the prices changeswith the appreciation of the Chinese Yuan, the expected changesbarely affect the trading in the international market (Jeanne, 2012).The reason for the difference in the passing of the price increaseresulting from the changes in the trading policies to the consumerwould adversely affect the demand for the Chinese import according tothe U.S Department of Labor.
Additionally,the exchange rate policymaking involves some challenges following theuse of different regression estimates. The robustness of theestimates is questionable following a large amount of data inconsideration. According to Lee (2014), the policy making regardingthe choice and the use of estimates gets affected by the statisticalsignificance of the estimates as well as the question of how countereffective the estimates may result. The balance between the abovechallenges shows that empirically the US dollar and the RMB cannot becompared simultaneously presenting impossibilities of acquiring therelative exchange rates (Lee, 2014). The relationships identifiedusing the estimates are of tenuous nature hence they cannot have beendepended on entirely.
Differentmodels of evaluation of the estimation of the foreign exchange varyin the results and the conclusions hence the difference in the policymaking. Defining the actual magnitude slope depends on thecoefficients variation. Each and every approach presents differentresults with the assumption that important aspects are not left out(Gay Jr, 2011). With the increased undervaluation of the RMB, itwould be entirely ignorant for the policy makers to miss out on thesemajor aspects of macroeconomics.
Inconclusion, The Chinese exchange rate policy plays a significant rolein the determining of the growth of the economy. It is evidentthrough the use of different approaches that the changes in theeconomic growth rate of the rest of the world affect the rate atwhich a specific country grows for instance in the case of China. Itis, however, evident also that the Chinese economy responds to thechange in the real exchange rate. Finally, the consumption rate inthe Chinese overpopulated environment determines the trade benefitsin the United States and other partners. The acceleration of thetrading partnership between the East and the West has the impact onthe strengthening of both currencies for the fair valuation of thetrading commodities for a balanced market.
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