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Reforming China�s Exchange Rate Policy

Author

Listed:
  • John Ryan

    () (European Business School, Regent�s College)

Abstract

This paper is aimed at analysing the decision of the Chinese central bank to reform the exchange rate of the national currency and to gauge the effects of this change in regime on the Chinese economy and the world currency markets. Although many nations have been largely disappointed by the relatively small revaluation of 2%, it will be argued that moving away from the dollar-peg is a step in the right direction in moving to a floating exchange rate, and the reform should be expected to occur in two-stages over a longer time frame The paper focuses on those studies attempting to estimate the under-valuation of the Renminbi and the effects of the change in policy. To enable the reader to understand the degree of misalignment of the. Renminbi this paper will examine various factors that determine whether the currency is undervalued. This will then allow the review of the policy options available to the central bank for facilitating an appreciation and the potential effects of a regime change will be reported. The expected outcomes on the currencies, US treasuries and trade deficit will also be analysed and the study will find that, post-revaluation, the dollar depreciates, the Yen moves in line with the Renminbi and the Euro strengthens, as was expected. The implications for the U.S. treasury market, after a move to a currency basket, is that China will reduce their dollar holdings by selling treasuries, however the region will still remain a net-buyer.

Suggested Citation

  • John Ryan, 2006. "Reforming China�s Exchange Rate Policy," Working Papers 2006_51, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2006_51
    as

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    References listed on IDEAS

    as
    1. John Williamson, 2001. "The Case for a Basket, Band and Crawl (BBC) Regime for East Asia," RBA Annual Conference Volume,in: David Gruen & John Simon (ed.), Future Directions for Monetary Policies in East Asia Reserve Bank of Australia.
    2. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
    3. Coudert, Virginie & Couharde, Cecile, 2007. "Real equilibrium exchange rate in China is the renminbi undervalued?," Journal of Asian Economics, Elsevier, vol. 18(4), pages 568-594, August.
    4. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
    5. Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1161-1182.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Renminbi; China; United States; Dollar; Euro and Yen;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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