China is one of the countries with unique currency exchange rate policies. Renminbi (RMB) or Yuan is the value of the country’s currency. China’s currency is not subject to control by any market forces. The central bank of China for years has been setting the country’s currency value. There have been interventions to make the exchange rate artificially weak in the foreign exchange market over the last couple of years. A weaker Yuan makes the exports cheap on the world market while making it expensive for imported goods China. The policy has worked for the advantage of China in contributing to a constant trade surplus as compared to the United States exchange rate policies.
China has enjoyed a stable and strengthened value of the currency since 2005. The success has been owed over the constant pressure by the United States government to have a more flexible, market-based exchange rate. However, last year, the currency had weakened significantly against the dollar (Goldstein& Lardy, 2016). The currency depreciated by 6%. In order for the country’s currency to stabilize, there should be significant changes made on the exchange rate policies. In my view, China again will have to consider a market-driven exchange rate policies just it did in 2005, and it paid off. There are a lot of changes in the foreign exchange market and trends that play a role in foreign currency exchange rates. The country’s continuous reliance on the central bank for the currency value appropriation makes China’s currency miss a lot of changes in the foreign market, consequently being risky based on stabilization. The policy change will ensure that the exchange rate value is not low against the dollar. A free-floating currency policy will also open opportunities for trade in the foreign exchange market. The cost of exports will be cheaper hence favoring the consumption of locally made goods in the country.
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Reference
Goldstein, M., & Lardy, N. (2016). China's exchange rate policy dilemma. American Economic Review , 96 (2), 422-426.
