The paper "Chinese Exchange Rate Policy" is an outstanding example of a Finance & Accounting essay. In July 2005, the Chinese government, through the Chinese Central Bank, announced the revaluation of the Yuan from 8.11 to the initial 8.27 per the United States dollar, indicating a small margin of 2.1 percent. The insignificant revaluation was however followed shortly by an announcement of an alteration of the exchange rate regime. The central bank made a declaration that the Yuan would not be pegged on the United States dollar from then on. This paper discusses the debates over the Chinese exchange rate policy with particular attention given to the implications of having an ‘ undervalued’ exchange rate on the current account.
Further, possible scenarios that may happen if China’ s current account balance is adjusted at a more flexible exchange rate in the future are examined. Ongoing debates on the Chinese exchange rate China’ s exchange rate policy has triggered a contentious debate. An underlying line of argument is that China should reform its exchange rate system by shifting into a controlled floating or flexible exchange rate policy that is based entirely on the market supply and demand (Goldstein & Lardy 2008).
Some observers have argued that substantial undervaluation of the exchange rate for the current account, or renminbi (TMB), contribute significantly to economic imbalances globally (Goujon & Guerineau 2006). Some researchers have also argued that the undervaluation of the Yuan has given China an unfair trade benefit. Hence, China has been criticized for leading the “ currency manipulation” tactic that has triggered losses of jobs, in Japan, the UK, the US, and Asian countries (Corden 2009). On the other end, some commentators have asserted that any reasonable appreciation of the RMB has the potential to substantially impact positions of the global current account (Goujon & Guerineau 2006).
In any case, proponents of flexible exchange rate policy for China have appeared to have an upper hand arguing that such a flexible regime would be essential for internal balance as it presents policymakers with a monetary policy tool that is more effective (Morrison & Labonte 2010). Indeed, maintaining an ‘ undervalued’ exchange rate continues to have affected the extent of imbalances in the country’ s external payments (Goujon & Guerineau 2006). Indications suggest that the country’ s RMB is substantially undervalued.
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