Importance of Chinese Yuan on the Economy
|✓ Paper Type: Free Assignment||✓ Study Level: University / Undergraduate|
|✓ Wordcount: 2375 words||✓ Published: 21st Oct 2020|
Research the Chinese Yuan and discuss its importance in the global economy
The importance of the Chinese Yuan on the global economy has significantly increased in recent years due to several factors such as relaxed regulations by the Chinese Government and the inclusion of the currency in the International Monetary Fund’s basket of reserve currencies, also known as Special Drawing Rights or SDRs. This recognition by the International Monetary Fund was mainly due to China’s substantially increasing dominance in the global economy and extreme growth since the mid to late 1990s along with relaxing of restrictions and barriers of its financial markets.The yuan, also known as the renminbi, or “the currency of the people”, officially joined the US dollar, English pound, the Euro and the yen as a reserve currency in 2016. In the early 1990s, China was not considered a major player in the world market. In 1994, the Chinese government decided to fix the value of the yuan to the US dollar at a rate of 8.690 yuan per dollar and by2005 the currency was trading at a fixed rate of 8,2665 per dollar. This put pressure on the United Statesand European markets as they faced strong competition from the Chinese in developing markets (Amadeo, 2017).It wasn’t until the late 1990s, when China became the world’s most populated country and its Gross National Income began to grow faster than the rest of the world. At this time, the country realized a tremendous inflow of yuan in its banking sector mainly because of its low manufacturing wages and billions in trade surpluses with the United States and the European Union. These factors coupled with the government’s restrictions on the flow of yuan left no real way to move the money out of the country,meaning that banks could lend money at very low interest rates. These factors led to a real estate boom,building reserves and the country investing heavily in US treasury bonds which had a significant impact on the growing US budget deficit. In August of 2015, the People’s Bank of China surprised markets by devaluating the yuan, through 3 separate devaluations, that reduced its value by 3%. This devaluation was the largest single drop of the yuan in approximately 20 years. The currency had appreciated 33% against the US dollar since 2005. This move was unexpected and was believed by many to be an effort by the Chinese to boost exports and enhancement their economy that was growing at the slowest rate in 25 years. This move impacted markets across the world as the US, European and Latin American markets fell in response to the devaluation. This was mainly tied to the historically steady appreciation of the yuan against the US dollarto which investors had become accustomed to stability and growth (Investopedia, 2017).
If you need assistance with writing your assignment, our professional assignment writing service is here to help!Assignment Writing Service
Looking at China’s current economy, discuss their exchange rate and the impact it has had on the foreign direct investment (FDI) in their country
The impact of the Chinese exchange rate on its direct foreign investment (FDI) has become more favorable in recent years than it has historically been, but China is still a more restrictive climate than what you see in Western and other countries. The Chinese government encourages foreign investment in a few sectors, but many of the country’s economic sectors remain closed to foreign investment.
Many people often think that a country can manipulate its own currency independently of other major policy actions. That is not the case.
Supply and demand says that to lower a price, such as the price of the yuan compared to the dollar, China should supply more yuan. The Chinese government can do that by printing more yuan (including what we might call virtual printing, which is creating additional bank balances denominated in yuan.) So they create more yuan, and use them to buy dollars. This increases the Chinese money supply, which tends to lower short term interest rates in China. In other words, China can successfully lower its exchange rate through expansionary monetary policy (Conerly, 2017).
Foreign investors are met with many obstacles, if not all out roadblocks, from the Chinese government through steps that protect state-owned enterprises from competition from foreign entities. This is achieved through many different tactics such as discriminatory practices, licensing barriers, selective regulatory enforcement and the lack of an independent judiciary system or in other words, a systemic lack of rule of law which all but eliminates the supply and demand from foreign entities. Poor enforcement of intellectual property rights, forced technology transfer rules and the countries favoritism towards local high tech products and advanced manufacturing sectors also show an obvious discrimination towards foreign organizations.
Many companies from the United States, along with industrial associations, have been very vocal in criticizing the discriminatory investment practices associated with the Chinese marketplace and feel it is unlikely that appropriate changes will be made in the near future to allow for greater access to the Chines market.
Officials in China continue to promise the implementation of reforms that would allow greater market access to foreign investors, but have been met with skepticism because of the lack of timelines and details being provided by the Chinese officials.
The Chinese yuan (CNY) rallied to its strongest value since May 2016 in September, continuing a trend that started in June amid stronger-than-expected growth and a weakening of the U.S. dollar. On 8 September, the yuan closed the day at 6.48 CNY per USD, which represented a 3.4% appreciation over the same day of the previous month. It gained 6.7% year-to-date and was 2.7% higher compared to the same day last year. In the following days, the yuan lost some of the ground due to a strengthening USD (Focus Economics, 2017).
What restrictions does the government have in place to restrict free trade?
China has historically employed a number of tactics to restrict free trade, including export quotas and licensing, implementation of minimum export prices, export duties and restrictions on numerous raw materials just to name just a few. Such restraints provide China tremendous advantages over foreign entities and make it difficult for foreign companies to compete in the region. It’s my understanding these tactics are implemented in order to put pressure on the foreign entities to move their operations, technologies, and jobs to China.
In 2001, China became a member of the World Trade Organization and started relaxing some restrictions in its foreign trade policy by reducing some administrative barriers and removing or lessening numerous restrictions for foreign investment. China appears to be making moves to open the world’s second largest economy via free trade zones and no longer requiring the foreign organizations to enter into joint ventures with Chinese partners. My understanding is this is strictly tied to foreign producers of rail transport and civilian satellites but is a positive step as it shows the Chinese are making an effort to relax restrictions in some areas that have historically been strictly enforced through one-sided joint ventures where the Chinese side takes the majority of the share.
In addition to the sectors mentioned above, others that were previously restricted from foreign investment such as precious metals and lithium mining, internet access services, credit rating services, and large scale theme park construction have also been opened up to foreign investment.
In mid-2004, China’s Foreign Trade Law went into effect allowing all types of enterprises, including private enterprises, to register for the right to conduct foreign trade. The law also allowed individual citizens to conduct foreign trade under the amended Foreign Trade law.
In the ten years since the Foreign Trade Law went into effect, the United States has won several World Trade Organization cases that were focused on China’s export restraints which included key inputs for a multitude of U.S.-made products, including hybrid automobile batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum, and chemicals.
In July 2016, the United States launched a third WTO case challenging export restraints maintained by China. The challenged export restraints include export quotas and export duties maintained by China on various forms of 11 raw materials, including antimony, chromium, cobalt, copper, graphite, indium, lead, magnesia, talc, tantalum and tin. These raw materials are key inputs in important U.S. manufacturing industries, including aerospace, automotive, construction and electronics (Export.gov, 2017).
Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.View our services
Discuss whether the Chinese Yuan is being used more in global transactions
The path for increased use of the yuan in global transactions was paved in 2015 when it was announced the Chinese currency would be joining the US dollar, the Euro, the English pound and Japanese yen as one of the International Monetary Fund’s (IMF) elite currencies. This decision by the IMF, which was supported by the United States Treasury, allowed for broader use of the yuan in international trade and finance and underscored China’s increasing financial and economic viability around the world. The designation did not come without stipulations from the IMF though.
In order to meet the requirements of the IMF, China was forced to relinquish some of its tight control of the currency which, in the past, had saw sudden devaluations that sent ripples through markets around the world. The IMF’s requirements also had the potential to introduce new uncertainties and volatility into the Chinese economy and financial systems at a time when the economy was already beginning to slow.
That being said, the designation into the special drawing rights unit bestows global importance on the country and is considered a point of pride for the Chinese. Through this designation the IMF is stating that the yuan is considered to be a safe and reliable currency that is freely usable in the global marketplace. Many central banks consider this unit as a benchmark in measuring reserves that are held to protect economies in times of financial instability. The unit is also used in the disbursement and repayment of international bailouts.
It is a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” Christine Lagarde, the managing director of the I.M.F., said in a statement in Washington. “The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy (Bradsher, 2015)”.
Although the dollar still dominates in world finance and trade, the yuan is quickly gaining ground on the euro and as it becomes increasingly woven into the global economy, the ability of Western nations to impose financial sanctions on China’s trading partners (i.e. Sudan and North Korea) have become more difficult because China can carry out transactions in yuan.
The IMF designation went into effect in 2016 and obviously carries many benefits for the yuan and the Chinese economy, but at the same time creates new geopolitical concerns that have yet to be truly realized.
- Amadeo K. (2017, July 17). China's Currency: The Yuan or Renmimbi. Retrieved from https://www.thebalance.com/china-s-currency-the-yuan-or-renmimbi-3305906
- Bradsher, K. (2015, November 30). China’s Renminbi Is Approved by I.M.F. as a Main World Currency. Retrieved from https://www.nytimes.com/2015/12/01/business/international/china-renminbi-reserve-currency.html
- Conerly, B. (2017, May 30). China Exchange Rate Forecast: More Stable Than Headlines Suggest. Retrieved from https://www.forbes.com/sites/billconerly/2017/05/30/china-exchange-rate-forecast-more-stable-than-headlines-suggest/#399d56766498
- Focus Economics. (2017, October 17). China Economic Outlook. Retrieved from https://www.focus-economics.com/countries/china
- Export.gov. (Updated 2017, July 20). China - Trade Barriers. Retrieved from https://www.export.gov/article?id=China-Trade-Barriers.
- HKTDC Research. (2017, April 3). Trade Regulations of China. Retrieved from http://hong-kong-economy-research.hktdc.com/business-news/article/Small-Business-Resources/Trade-Regulations-of-China/sbr/en/1/1X000000/1X006MY8.htm
- Investopedia. (Retrieved 2017, October 24). The Impact of China Devaluing the Yuan. Retrieved from http://www.investopedia.com/trading/chinese-devaluation-yuan/ (Links to an external site.).
- Reuters. (2016, March 30). China's yuan more widely adopted to settle transactions - SWIFT. Retrieved from http://www.reuters.com/article/china-yuan-swift/chinas-yuan-more-widely-adopted-to-settle-transactions-swift-idUSL5N1721Z5
Cite This Work
To export a reference to this article please select a referencing stye below:
Related ServicesView all
DMCA / Removal Request
If you are the original writer of this assignment and no longer wish to have your work published on UKEssays.com then please: