Ever since China adopted its Open Door policy, it has received unparalleled attention from international scholars. In recent years, this has been evident with respect to the exchange rate regime that China has applied. At first, the policy was lauded because it helped China steer the dire waters of the Asian Crisis that occurred in the late 1990s. Even after the world entered the new millennium, the exchange rate regime has been heavily criticized. Most of this criticism came from the USA, since they placed China at the top list of who to blame for the worsening trade deficit, especially referring to the undervalued nature of the Renmimbi (RMB). However, this is just a part of what we address in this paper. In the first part, we will explain the current situation in China. We will see how the Chinese exchange rate regime changed from a dollar peg, to a peg based on the existing basket of currencies.
[...] in their paper on the Overvaluation of Renminbi Undervaluation. Throughout China's economic development the RMB was subject to a lot of pressure regarding its value. The United States kept claiming the undervaluation of the Chinese currency had dramatic impacts on its trade deficit. Indeed, until 2005 the RMB was under a fixed exchange rate regime, pegged to the American dollar. On July the People's Bank of China (PBOC) adopted a managed floating exchange rate system, giving its currency greater flexibility. [...]
[...] ‘China is by far the largest developing country to continue to cling to a currency peg even after the Argentine and Turkish crises of 2001. That may have something to do with the fact that the peg appears to have served china well. The country was one of the few in Asia not to succumb to the crises of 1997- 98' (Frankel and Wei; 2007; p.2). Since the exchange rate worked so well during the rough days of the Asian Crises, China would be reluctant to change it completely. [...]
[...] Malik, Khalid, ‘Launch of the China Human Development Report 2005', December Moosa, Imad, Naughton, Tony & Li, Larry 2006, Exchange Rate Regime Verification: Has China Actually Moved from a Dollar Peg to a Basket Peg?, Centre for Financial Studies working paper, Melbourne, http://www.melbournecentre.com.au/workingpapers/Moosa_Naughton_ChineseExchan geRateRegime.pdf Morrison, W ‘China's Economic Conditions.' Ryan, J ‘Reforming China's Exchange Rate Policy.' Mac Donald's world database,2008, Hamburger Standard' ,based on July 2007 Prices, The Economist, http://www.oanda.com/products/bigmac/bigmac.shtml The International Monetary Fund , ‘World Economic Outlook Database', April 2007, http://www.imf.org/external/pubs/ft/weo/2007/01/data/weorept.aspx?sy=2004&ey =2007&sort=country&ds=.&br=1&c=924&s=PPPEX&grp=0&a=&pr1.x=62&pr1.y=9 The People's Bank of China ‘Public Announcement of the People's Bank of China on Reforming the RMB Exchange Rate Regime' ,http://www.pbc.gov.cn/english/detail.asp?col=6400&id=542 Tung, C. & S. Baker Revaluation will Serve China's Self- Interest.', China Economic Review -335 Xing, Yuqing is China so attractive for FDI? The role of exchange rates', China Economic Review, Vol pp. 198-209 Yang, J. & I. Bajeux-Besnainou the Chinese Currency Undervalued?', International Research Journal of Finance and Economics, Issue pp. 106–130. Yin-Wong Cheung, Menzie D. [...]
[...] Ryan (2006) also points out that allowing the RMB to float will arguably allow for less intervention from the Chinese government as the currency's exchange rate will stabilise on its own. He cautions, however, that speculator's anticipation of the increase in the RMB may destabilise the currency in the short term. Other observers have noted that the appreciation of the RMB may allow for more efficient and higher-value output, a point that will benefit investors in the Chinese economy in the long run. [...]
[...] We will calculate the exchange rate of Chinese RMB following the LOP method, using the average price of a big Mac for 2007. China's average big Mac price is 11 RMB; USA average big Mac price is 3.41 USD; thus Sppp(RMB/USD) = 11/ 3.41 = 3.23 However, those indexes are assuming that countries have the same characteristics. Obviously a country differ in consummation market, preferences of commodities, cost of raw goods, thus using only the big Mac index won't be relevant, as the production's cost will be different in United states than in China. [...]
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