Deflated Chinese Yuan and the negative ramifications on the world economy

Deflated Chinese Yuan and the Negative Ramifications on the World Economy

Introduction

Starting from 1994 up to July 21 , 2005 China had pegged its currency the renminbi or Yuan to the US dollar at the rate of 8 .28 Yuan . The central bank of China all along had been buying and selling dollar-denominated assets in exchange for the new money the government was printing , which was resulting in keeping the exchange rate fixed although there had been changes in various economic factors that would have led to the appreciation of the

Yuan against the dollar . What this implies is China had always been using a fixed exchange rate regime where the rate of exchange was kept by government made policies that used to allow a fluctuation rate of minus or plus 0 .3 percent . If the Yuan had been floating like the dollar and other currencies , what would determine the exchange rate of the Yuan to the dollar would have been the global demand for the goods and services that originate from China , as well as the value of China 's assets

On the outset , when the peg was introduced , the value of the Yuan was close to its real value , but in due time because of the changes that had occurred in the economic condition it should have been appreciated That was not the case since looking at the amount of growth that occurred in China 's foreign exchange reserve reveals that it grew from 403 billion at around the end of 2003 to 1 .2 trillion at the end of March 2007 . In addition , China has a trade surplus of 178 billion with the US alone at the end of 2006 that attests the deflated value of the Yuan (1 . Moreover , since this particular currency cannot be fully converted in international markets , it is possible to say there is a rigid restriction in place , while at the same time the Chinese government is in a position to introduce various monetary policies in to stimulate the local economy

What took place in July 21 , 2005 was China declared that the Yuan would be exchangeable according to demand and supply in the marketplace against a given number of currencies that include the dollar , yen , euro and the Korean won (2 . The first adjustment was a 2 .1 percent appreciation that would adjust the 8 .28 rate of exchange to 8 .11 and the arrangement was to let the Yuan function as a controlled floating currency against a basket of currencies where it could fluctuate plus or minus 0 .3 percent on a daily basis (3 . Since this particular introduction , the Yuan had been appreciating slowly and it had not deterred China from accumulating foreign reserve at a rapid pace that led nations such as the US to point out that still the value of the currency is at a deflated rate . Overall , the measure taken had not eased the concerns of nations such as the US that has a...