In some moments, the actual FDI was much lower than a half of the expectation. As such, the current managed floating rate regime is a temporary and transitional tool for Chinese government to balance the domestic growth as China float or not as the financial stability and it is not sustainable in the long run.
The China companies had to consider more whether they go to invest in low labor cost countries with more risks or stay in China with low cost of labor and also low production cost and maybe low tax.
If China were to adopt a full floating exchange rate regime, the competitive advantage stemmed from cheaper raw material and labor maybe compromised due to the appreciation of the RMB. We also can see the effects in the reform of agriculture which increased China float or not productivity and rural incomes.
Given the complexity and potential huge impact of the foreign exchange policy reform, Chinese government should start with banking sector reform then followed by the foreign exchange regime reform and liberalization of capital controls at the same time.
However, they soon realized that China was still extremely cautious in adopting a fully floating exchange rate system and provided very limited flexibility on the exchange rate system. With a healthier banking sector, China could continuously further deepen the foreign exchange policy reform and the liberalization of the capital controls at same time.
June June Related posts: However, China is still heavily relying on export to grow their GDP at this point and a revaluation of RMB would be very dangerous for the country.
FDI growth in Figure 4. At the end of the day, the drastic reduction in trade balance deficit will be adjusted through the USD appreciation when the new balance is reached where BOP equals zero.
But this is particularly true for big economies. As stated previously in the case write-up, the current managed floating foreign exchange regime was a transitional tool for the Chinese government to balance the economic growth and financial stability, given the increasing high cost to maintain the regime as well as the refrain to the real economy, this managed floating system was considered not sustainable.
So, whether China likes it or not, its heavily managing exchange rate regime is a legitimate concern of its trading partners. The depreciation of RMB really worked well with the government development strategy in the aspect of attracting more investors to stimulate exports.
FDI Top 10 countries investing in China.
The reform will gradually provide RMB exchange rate more flexibility and move to a more market oriented economy, in which the risks of a sudden devaluation of RMB are significantly reduced. The reduced imports from China are unlikely to stimulate the growth of the domestic productions of those countries and most likely they will import from other low wage countries.
As growing capital flows to China put pressure on the revaluation of RMB, Chinese government has to absorb large amounts of USD and exchange them to RMB that are subsequently released to the economy, which in turn fuel the domestic inflation and overheat the economy.
Similarly, China is increasingly important as a source of parts and components for manufacturing in other countries. On the flip side though, a revaluation of the RMB would not necessarily change the current situation of US and EU who had a large trade deficit with China.
To fight against the inflation, the government has to raise the interest rate and reserve requirements. At the same time, FDI is invested in low yield US treasury bonds while used productively to develop the economy.
A healthier banking sector would enable China to perform the internal credit allocation more effectively which is imperative for a sustainable long term growth of the economy.
As we know, China exports a wide range of final goods. However, these trials were not enough to help banking sector become more commercially oriented. How would changes in exchange rate policy impact growth in China as well as the rest of the world?
The daily trading price of the U. Whenever RMB was kept at such low rate, the U. Under the flexile exchange rate regime, if the USD appreciates against RMB, China would be able to leverage on the relatively low manufacturing costs and labor therefore to gain the competitive advantage on trading, which will help China grow its exports to US.
Furthermore, the highly regulated interest rate system prevents the banks from charging higher interest rates to compensate the high risk borrowings, which stimulates the borrowings of firms and contribute to the overheating of the economy.
Top countries investing in China were who had a lot of number of oversea Chinese as Hong Kong, and regions those had a long historical trading with China as Japan, South Korea Fig. Search China, float or not? The depreciation can push for an increase in exports and thus relieve domestic unemployment pressures because the Chinese economy is heavily dependent on exports.
Those activities did help in some ways, e. Unfortunately, globally, the devaluation of the RMB worsens the tension that comes from the trade imbalance with the United States as well as global economic crisis.
On the contrary, it will consume more natural resources and worsen the already damaged environment. The Chinese government and central bank was striving to maintain the RMB exchange rate at a stable and equilibrium level. As we can observe from Exhibit 12a and 12b, Chinese government imposed a very tight control in capital to make sure the value of RMB always undervalued.
Why Chinese government did like that? Nonresidents almost were not allowed in purchase capitals, derivatives or direct investments. What would be the impact for China and the U.July 21, China to revalue its decade of quasi-fixed exchange rate of about yuan per U.S.
dollar by % to %, and at the same time, introduced a more market-based exchange ultimedescente.com analysts and economists were disappointed that they perceived little change, and called for greater flexibility in the dollar / yuan exchange rate.
China: To Float or Not to Float (A) Case Solution, On 21 JulyChina revalued its rate of the decade nearly yuan peg to the U.S. dollar from % to % and at the same time, introduced a system. On July 21,China announced a 2. 1 percent appreciation of the RMB against the US dollar, from 8.
28 to 8. 11, a move to a managed float, and a number of other “reforms” such as in agricultural, state-owned enterprise, banking sector and trade reform, etc. China to Float or Not to Float Below is a brief description of the various arguments presented on the topic.
Political: With the value of the Dollar decreasing over the recent years, the western governments are less pleased with China maintaining its.
The question is not if, but how and when the yuan will float. UPDATE! China took the long expected step and on July 21,relaxed its currency policy—at least somewhat. Doing business with China The countries trying to export goods and services to china were not being favored due to the stringent import policies.
China was able to keep a competitive advantage over other countries such as the US.5/5(1).Download