There has been increased trading between countries since the countries produce different goods and services. The trading has been a result of the different countries desiring to acquire goods and services that they do not have so as to satisfy their needs and wants that are essential for their well-being. The trading therefore can be enhanced using money which comes in different currencies, thus the countries which conduct business thus exchange their currencies to suit with the countries they are trading with so as to enhance effective transaction of business between the countries. The exchange rate is also known as foreign exchange rate, forex rate, or FX rate. It refers to the price of one currency of a country in relation to another currency of different countries that conduct business. For example, an exchange rate of 102 Japanese yen (JPY) to the United States dollar (USD) refers to JPY 102 is worth IUSD (1 United States Dollar). There are two types of exchange rates: spot exchange rate and forward exchange rate. The spot exchange rate refers to the current value of the exchange rate, while the forward exchange rate refers to an exchange rate that is quoted and traded today but is delivered and paid on a specified future date set by the trading companies.
The exchange rate quotation is derived by stating the number of units of term currency or price currency that can be bought in terms of the unit currency, which is also known as the base currency. The order in which the market conversion is determined is by using the base currency and the term currency is EUR – GBP – USD- *** (***refers to any other currency). The conversion of the EUR into AUD, then EUR is referred to as base currency while the AUD is referred to as the term currency.
The currency of China is referred to as Renminbi (RMB) it is also known as Yuan and Kuai. The Renminbi was in earlier years pegged to the United States dollar at 8.28 RMB but in the year 2005 it was revalued to 8.11 per US dollar, the revaluation was as a result of pressure from the United States and the World Economic Council. There were suggestions that the Chinese currency- Renminbi would be pegged to US dollar since it would enhance trade within other currencies such as Euro, Japanese Yen and South Korean, British Pound, Thai Baht, and the Russian Ruble since it was reported that the level of inflation was quite high thus the pegging of the currency was seen as a solution to rise in prices which were increasing daily.
The factors that led to the appreciation of Yaun against the US dollar were that the Chinese dollar was not convertible and was not an international currency. The money that came from international countries led to excess liquidity that caused a rapid increase in the prices and this led to the depreciation of the Chinese currency for the people of China’s mainland. In January 2008 the Renminbi closed at 7.2934 to the dollar in Shanghai trading and has been appreciating at 11.5% over a long time of period that is from US dollar on July 21 2005 since the time China de pegged from the US dollar. The purchasing power of the Chinese people has been declining with time due to the fact that the Chinese government de pegged itself from the US country and contributed to the rising in prices of meat, grain, and real estate. The appreciation of the Chinese money has attracted foreign money into the country and this contributed to the increased gains in the stock and real estate markets and finally led to the rapid growth of the domestic assets. The Chinese currency cannot evade international inflation because of its non-convertibility to the internal currencies and thus the country cannot enjoy the benefit of having its currency revalued since it does not do its business with the United States.
In the past two years, China’s country has recorded an increase in its purchasing power due to the fact that commodities such as crude oil and copper prices have increased since the US currency was noted to have currency to be weak thus it could not compete effectively with the international market.
In the past, the price was liberalized depending on the state-owned enterprise that was in place that would respond to the exchange rate fluctuations in the market mechanism, but currently, the exchange rates have been passing through the domestic prices and have been varying across industries that conduct trade. The shares of China exports and imports have been at one time appreciated the Chinese currency. An estimation that was carried out using an estimation parameter indicated that 10% of real appreciation of Chinese currency lowered the share aggregate by half a percentage point thus the prices adversely affected the exchange rate.
Some studies carried out revealed that the local currency price was affected by the appreciation of the exporter’s currency than its depreciation, although no conclusion method has been defined to price since most firms prefer to adjust their prices according to the market mechanism. The exchange rate of China against the U.S dollar appreciated from 8.7.1 to 8.3.1, between 1994 to 1997, but in 1997 the currency was reduced by the government so as to reduce the shock of the Asian crises and to dispel the devaluation of the Chinese currencies. The United States produced products that were of high quality but China due to its small arable land it could not produce the agricultural produce thus it relied on the United States government to supply it with agricultural products According to some experts the country can reduce the declining purchasing power of the Chinese currency by adopting measures to streamline asset prices, to elevate the people’s income levels and increasing its export prices. The government of China can improve its purchasing power by strengthening its supervision of influx of speculated funds overseas so as to prevent domestic asset depreciation and to prevent financial crises. The appreciation of the Chinese currency can moderate domestic inflation this is because the appreciation of the currency can help the exportation of goods and services to foreign countries to be easier and cheaper and this can help to alleviate the problems of increase in prices that is inflation.
The policy of the Chinese currency the Renminbi that existed between 1994 and July 2005 pegged the value of the Renminbi against the value of the United States Dollar so as prevent a competitive devaluation of the Renminbi currency, although it was praised by the Asians in 1998, the policy was later criticized by the United States residents thus it was not implemented. In the year 2003, the value of the dollar declined and this led to the loss of value of the Chinese currency and this resulted in the Mainland Chinese exports being more competitive. China was forced by the United States country to increase the value of the Renminbi so as to encourage imports and to decrease exports since the value of the dollar had declined due to the pegging of the Chinese currency. It was reported that the decline in value of the dollar and the Chinese currency affected the manufacturing jobs as they were diminishing with the time that is why the G7 and the European Union found it important to revalue the exchange rate so that performance in the United States would not be adversely affected.
According to Zhuang Jian, he stated that the government of China should have allowed the currency to appreciate against the dollar despite the risks of economic slowdown and job losses at the export-oriented enterprises since the currency’s revaluation would give an opportunity to restructure the economy and improve its balance of trade. The undervaluation of the Yuan made Chinese products to be cheap and it resulted in the balance of trade of China being favorable.
The Chinese government would buy fewer United States treasury bonds, causing bond prices to fall and bond yield to rise and this hampered the improvement of the United States economy. The other consequence was that the United States dollar loss of value was that it caused the price of oil to be out of reach of the American economy and this caused stag inflation that led to the collapse of US oil-dependent industries, massive unemployment, and other dire economic consequences. The government of China’s idea to relax the revaluation of its exchange was a good idea because the revaluation would result in consequences that would result in loss of profits from the investments that would be invested in the country.
The government of China can improve its purchasing power by strengthening its supervision of the influx of speculated funds that are overseas so as to prevent domestic asset depreciation and to prevent financial crises. The appreciation of the Chinese currency can moderate domestic inflation this is because the appreciation of the currency can help the exportation of goods and services to foreign countries to be easier and cheaper and this can help to alleviate the problems of increase in prices that is inflation.
References
Brada, C.J., A. Kutan, and S. Zhou (1993), “China’s Exchange Rate and the Balance of Trade,” Economics of Planning, Vol. 26, 229-242.
Lardy, N.R. (1992), Foreign Trade and Economic Reform in China, 1978-1990, Cambridge: Cambridge University Press.