TOPİC OF THE ARTİCLE: CHİNA’S EXCHANGE RATE REGİME, MACRO ECONOMİC POLİCY, RENNİMBİ (YUAN) AND THE NEW ASİAN CURRENCY İSTANBUL TİCARET UNİVERSİTY

DEPARTMENT: İNTERNATİONAL BANKİNG AND FİNANCE.

SUBJECT: İNTERNATİONAL FİNANCE.

LECTURER: ŞADUMAN OKUMUŞ

PRESENTOR: KHALİD MOHAMED MOHAMUD

DATE: 26/05/2014

What is an Exchange Rate?

What is an Exchange Rate?

• CONTENTS

• 1. İNTRODUCTİON– The Importance of Exchange Rates in the Global

Economy– Impact on International Trade and Investment

• A. International Trade

• B. International Investment– Types of Exchange Rate Policies

• Fix” or “peg” their exchange rate.

• Floating” or flexible exchange rate.

– General Debates over “Currency Wars”– Specific Debates over Exchange Rates– Currency Interventions

• 2. Overview of China Economy (Macro Policy).

• 3. China Exchange rate regime.

• 4. New Asian Currency

• 5. Recommendation and conclusion

• 1.1 The Importance of Exchange Rates in the Global

• Economy• What is an Exchange Rate?• An exchange rate is the price of a country’s

currency relative to other currencies. In other words, it is the rate at which one currency can be converted into another currency. For example, on August 30, 2013, one U.S. dollar could be exchanged for 0.76 Euros (€), 98 Japanese yen (¥), or 0.65 British pounds (£).8

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• Consumers use exchange rates to calculate the cost of goods produced in other countries.

 • How much a currency is worth in relation to

another currency is determined by the supply and demand for currencies in the foreign exchange market (the market in which foreign currencies are traded).

• Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013, up from $3.3 trillion in April 2007.

• A. International Trade• Exchange rates affect the price of every export

leaving a country and every import entering a country. As a result, changes in the exchange rate can impact trade flows. When the value of a country’s currency falls, or depreciates, relative to another currency, its exports become less expensive to foreigners and imports from overseas become more expensive to domestic consumers. These changes in relative prices can cause the level of exports to rise and the level of imports to fall.

• B. International Investment•  • Exchange rates impact international investment in

two ways. First, exchange rates determine the value of existing overseas investments. When a currency depreciates, the value of investments denominated in that currency falls for overseas investors. Likewise, when a currency appreciates, the value of investments denominated in that currency rises for overseas investors.

• For example, if a U.S. investor holds a German government bond denominated in Euros, and the euro depreciates, the value of the bond in U.S. dollars falls, making the investment worth less to the U.S. investor. And vice vs.

• Second, exchange rates impact the flow of investment across borders. For example, a depreciating euro may deter U.S. investment in the Eurozone, while an appreciating euro may increase U.S. investment in the Eurozone.

• 1.3. Types of Exchange Rate Policies• fix” or “peg” their exchange rate.• floating” or flexible exchange rate.

•Source: IMF, “Annual Report on Exchange Arrangements and Exchange Restrictions,” 2012.

Source: IMF, “Annual Report on Exchange Arrangements and Exchange Restrictions,” 2012.

• 1.4. General Debates over “Currency Wars”• Amid heightened concerns about slow growth and high

unemployment in many countries, disagreements over exchange rate policies have broadened after the global financial crisis.

• In2010, Brazil’s finance minister, Guido Mantega, declared that a “currency war” had broken out in the global economy.20

• At the heart of current disagreements is whether or not countries are using policies to intentionally push down the value of their currency in order to gain a trade advantage at the expense of other countries.

• A weak currency makes exports cheaper to foreigners and imports more expensive to domestic consumers. This can lead to higher production of exports and import- competing goods, which could help spur export-led growth and job creation in the export sector.

• However, if one country weakens its currency, there can be negative implications for certain sectors in other countries. In general, a weaker currency in one country can hurt exporters in other countries, since their exports become relatively more expensive and may fall as a result.

• Additionally, domestic firms producing import-competing goods may find it harder to compete with imports from countries with weak currencies, since weak currencies lower the cost of imports. Under certain circumstances, policies used to drive down the value of a currency in one country can cause other countries to run persistent trade deficits (imports exceed exports) that can be difficult to adjust and can be associated with the build-up of debt.

• For these reasons, some economists view efforts to boost exports through a weaker exchange rate as “unfair” to other countries and a type of “beggar-thy-neighbor” policy—the benefit the country gets from the policy comes at the expense of other countries.

• 1.5. Specific Debates over Exchange Rates• In current debates about exchange rates and

whether countries are engaged in unfair currency policies to weaken their currencies, two major types of concerns have been raised: first, concerns about countries engaged in interventions in foreign currency markets, and second, concerns about the effects of expansionary monetary policies in some developed countries on exchange rate levels.

• 1.6. Currency Interventions• Governments have various mechanisms they can

use to weaken, or devalue, their currency, or sustain a lower exchange rate than would exist in the absence of government intervention. One way is intervening in foreign exchange markets or, more specifically, selling domestic currency in exchange for foreign currency. These interventions increase the supply of domestic currency relative to other currencies in foreign exchange markets, pushing the price of the currency down

2. Overview of China Economy (Macro Policy),

• Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role - in 2010 China became the world's largest exporter.

• Also keeping its currency tightly linked to the US dollar for years, in July 2005 China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. From mid 2005 to late 2008 cumulative appreciation of the reniminbi against the US dollar was more than 20%,

• but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010.

• The government's 12th Five-Year Plan, adopted in March 2011, emphasizes continued economic reforms and the need to increase domestic consumption in order to make the economy less dependent on exports in the future.

• GDP (purchasing power parity)• $12.61 trillion (2012 est.) 

$11.7 trillion (2011 est.) $10.7 trillion (2010 est.) note: data are in 2012 US dollars

GDP (official exchange rate)• $8.227 trillion 

note: because China's exchange rate is determine by fiat, rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China's output; in China's situation, GDP at purchasing power parity provides the best measure for comparing output across countries (2012 est.)

• GDP - real growth rate• 7.8% (2012 est.) 

9.3% (2011 est.) 10.4% (2010 est.)

• GDP - per capita (PPP)• $9,300 (2012 est.) 

$8,700 (2011 est.) $8,000 (2010 est.) note: data are in 2012 US dollars

• Gross national saving• 50.4% of GDP (2012 est.) 

51.1% of GDP (2011 est.) 52.1% of GDP (2010 est.)

• GDP - composition, by end use• household consumption: 35.7% 

government consumption: 13.5% investment in fixed capital: 46.1% investment in inventories: 2% exports of goods and services: 26.9% imports of goods and services: -24.1% (2012 est.)

• GDP - composition by sector• agriculture: 10.1% 

industry: 45.3% services: 44.6% (2012 est.)

• Population below poverty line• 13.4% 

note: in 2011, China set a new poverty line at RMB 2300 (approximately US $3,630) (2011)

• Labor force 798.5 million note: by the end of 2012, China's population at working age (15-64 years) was 1.0040 billion

• Labor force - by occupation• agriculture: 34.8% 

industry: 29.5% services: 35.7% (2011 est.)

• Unemployment rate

• 6.5% (2012 est.) 6.5% (2011 est.) note: registered urban unemployment, which excludes private enterprises and migrants, was 4.1% in 2012

• Household income or consumption by percentage share

• lowest 10%: 3.5% highest 10%: 15% note: data are for urban households only (2008)

• Distribution of family income - Gini index

• 47.4 (2012) 48.4 (2007)

• Investment (gross fixed)• 46.1% of GDP (2012 est.)• Budget• revenues: $1.857 trillion 

expenditures: $1.992 trillion (2012 est.)• Taxes and other revenues• 22.6% of GDP (2012 est.)• Budget surplus (+) or deficit (-)• -1.6% of GDP (2012 est.)

• Public debt• 31.7% of GDP (2012 est.) 

38.5% of GDP (2011) Inflation rate (consumer prices)

• 2.6% (2012 est.) 5.5% (2011 est.)

• Central bank discount rate• 2.25% (31 December 2012 est.) 

2.25% (31 December 2011 est.)• Commercial bank prime lending rate• 6% (31 December 2012 est.) 

6.56% (31 December 2011 est.)

• Current Account Balance• $213.8 billion (2012 est.) 

$201.7 billion (2011 est.)• Exports• $2.057 trillion (2012 est.) 

$1.812 trillion (2011 est.)• Imports• $1.735 trillion (2012 est.) 

$1.57 trillion (2011 est.)• Reserves of foreign exchange and gold• $3.341 trillion (31 December 2012 est.) 

$3.213 trillion (31 December 2011 est.)

• Debt - external• $770.8 billion (31 December 2012 est.) 

$685.4 billion (31 December 2011 est.)• Stock of direct foreign investment - at home• $1.344 trillion (31 December 2012 est.) 

$1.232 trillion (31 December 2011 est.)• Stock of direct foreign investment - abroad• $502 billion (31 December 2012 est.) 

$424.8 billion (31 December 2011 est.)

• Exchange rates• Renminbi yuan (RMB) per US dollar - 

• 1 Chinese Yuan equals

0.16 US Dollar• 1 US Dollar equals

6.24 Chinese Yuan(2014)• 6.3123 (2012 est.) 

6.4615 (2011 est.) 6.7703 (2010 est.) 6.8314 (2009) 6.9385 (2008)

3. China Exchange rate regime

• China uses managed exchange rate regime.• 1 Dollar/6.25 Chinese Yuan.• Over the past decade, the Chinese government has

tightly managed the value of its currency, the renminbi (RMB) or yuan, against the U.S. dollar. Some policy makers and analysts believe that China’s currency policies keep the RMB undervalued relative to the U.S. dollar. They argue that China’s policies give Chinese exports an “unfair” trade advantage against U.S. exports and are a major contributing factor to the U.S. trade deficit with China. In 1994, China began to peg its currency to the U.S. dollar and kept it pegged to the U.S. dollar at a constant rate through 2005.

• In July 2005, it moved to a managed peg system, in which the government allowed the currency to fluctuate within a range, and the currency began to appreciate. In 2008, China halted appreciation of the RMB, due to concerns about the effects of the global financial crisis on Chinese exports. In 2012, China again allowed more flexibility in

• the value of the RMB against the U.S. dollar. Between 2005 and the end of 2012, the RMB

• appreciated by almost 25% against the dollar (Figure 1).

• The Chinese government has used various policies, including intervening in foreign currency markets and capital controls, to manage this appreciation of the RMB against the U.S. dollar. It does so primarily by printing yuan and selling it for U.S. currency and assets denominated in U.S. dollars, usually U.S. government bonds. It also manages the value of its exchange rate through capital controls that limit buying and selling of RMB.29 As China has engaged in currency interventions, its holdings of foreign exchange reserves have increased, from $715 billion in the first quarter of 2005 to $3,463 billion in the first quarter of 2013 (Figure 2), equivalent to about

• 38% of China’s GDP.

• They point to the fact that foreign exchange reserves have not grown as quickly since 2011 as some evidence of this adjustment. In July 2012, the IMF changed its assessment of the RMB’s value from significantly undervalued to moderately undervalued

New Asian Currency

Source: Bank for International Settlements, “Foreign Exchange Turnover in April 2013: Preliminary Global Results,” Triennial Central Bank Survey, September 2013, https://www.bis.org/publ/rpfx13fx.pdf.

4. New Asian Currency• There are many reasons for the decline of the value of

the US dollar over time, and today the central bankers of Asia from China to Japan have realized that the time has come for the creation of a new mega currency similar to the euro: the New Asian Currency

• Finally, we have reached the end of the line for the US dollar currency supremacy, and that has to do among other things with the economic and geopolitical changes that we have had in the world since 1945.

• The US dollar served its purpose since the end of WW II and became the major foreign exchange reserve currency for the system that emerged after the war. The days of the US dollar playing that special role that created an international monetary system that revolved around the US dollar as its main currency has reached the end of the line, since today that system is very sick and it is dying a slow death.

• The US government and Americans in general lost sight of the role that the US dollar has been playing in the world international monetary system since 1945 when the US dollar started becoming an important part of the foreign exchange reserves of many countries. When a currency achieves that status of a major reserve currency the world expects at a minimum that the currency would be managed in a way to protect its intrinsic value over time. That is not what has been happening to the US dollar for a long time.

• The value of the 1947 US$ 1.00 has declined consistently since the US dollar became the major foreign exchange reserve currency, and in April 2009 that same US$ 1.00 dollar is worth only $ .08 cents; that is how much of the value of the US dollar has evaporated because of inflation.

• During the Reagan and Clinton administrations, the method of calculating rising prices was altered in ways that lowered the official US inflation rate, and if we adjust the current value of the 1947 US$ 1.00 to be consistent with the pre-1983 method of calculating inflation, then the current value of that same US$ 1.00 dollar would be worth about $ .01 cent.

• Since the US dollar became the center of the international monetary system starting with the Marshall Plan in 1947 - an unusual place for the currency of any one country to stay for a long period of time - the world has changed in drastic ways during all these decades resulting in a system that is completely broken today and ready to be replaced by a new system that represents the new global circumstances that have evolved since that time.

• (Today over 70 percent of the US dollar currency ever created is flying around the world outside the circle of influence of the US Federal Reserve and the US government.)

• Today, the United States is no longer master even of its own currency, since the accumulation of US dollars as foreign currency reserves by other countries around the world has placed the future economic and financial policy options of the United States in real jeopardy.

• At the outset of the 21st Century slowly a new international monetary system is emerging as we move from a system dominated by one world superpower and its dominant currency, the US dollar, to a new world system of 4 or 5 major block of countries and its currencies - these are the members of the new world economic order which will include the North American Union (US dollar),

• the European Union (euro), the Asian Union (New Asian Currency), the Arab Middle East Union (Gulf Currency), and maybe even some other economic Union block that we can't see at this time.

• Regarding China and the New Asian Currency (RGE Monitor - July 2009) It is time for China to show a sense of leadership and create immediately and implement a plan for the creation of a New Asian Currency similar to the euro – and give central bankers a new major foreign exchange reserve option for them to be able to diversify their current holdings.

• Source:http://en.wikipedia.org/wiki/User:Amazonas/New_Asian_currency

5. Recommendation and conclusion

• It is time for China to create immediately and implement a plan for the creation of a new Asian currency similar to the euro because of the collabse of the intrinsic value of Dollar.

• But, similarly it would be a mistake for China to try to establish the yuan as the new Asian currency to compete with the US dollar and the euro as one of the main global reserve currencies.

• A new Asian currency would be a better choice in the long run not only for China, but also for the other countries that decide to adopt the new Asian currency including Japan and Brazil.

• An international monetary system based on the US dollar has had its advantages over the years for the US, but eventually it has placed the United States in a situation that the US government is no longer a master of its own destiny, since a few select countries are holding a massive amount of US government debt. A system like that is unsustainable in the long run and eventually becomes a major liability, as is the case today of the United States and its creditors.

• Also, Brazil adopt the new Asian currency right from its inception since that strategy would help integrate the Brazilian and the Chinese economies in the years to come.

• Here is why a new Asian currency similar to the euro is a better choice than the yuan for the new international monetary system because will provide macroeconomic stability for brazilians and other members.

• The members of the Executive Board of the European Central Bank (ECB) are not there to represent their countries of origin. They are there to provide stability to the euro and they look at Euroland as a whole when making their policy. The euro is a monetary arrangement, and its monetary policy will be adopted independent from political control from its members.

• such policies also will be good for Brazil. The Brazilian economy will be better off under the euro system than under the fragile and weak Brazilian currency.”

• That same type of logic also applies today regarding China. It will be better for China and the other countries that decide to adopt this new Asian currency; to create this new Asian currency and have a similar arrangement as the euro in Euroland