The official currency of the
People’s Republic of China
(PRC) is Renminbi (meaning in Chinese: "people’s
currency").
The People’s Bank of China,
the PRC’s monetary authority, issues
the Chinese currency. The official ISO
4217 abbreviation of China’s currency
is CNY, but it is also abbreviated as "RMB".
Colloquially, the Chinese
currency is also called Yuan
and Kuai.
During the previous decade, Mainland
China’s Currency was pegged to the U.S.
dollar at 8.28 RMB. On July 21, 2005,
it was revalued to 8.11 per U.S. dollar,
following the removal of the peg to the
U.S. dollar. The revaluation resulted
from pressure from the United Stated
and the World Economic Council.
The People’s Bank of China also announced
that the Renminbi would be
pegged to a basket of foreign
currencies, rather than being
strictly tied to the U.S.
dollar, and would trade within a narrow
0.3 percent band against this basket
of currencies. China has stated that
the basket is dominated by a group of
international currencies including the
U.S. dollar, euro, Japanese yen and South
Korean won, with a smaller proportion
made up of the British pound, Thai baht
and Russian ruble.
History of Chinese Currency
The renminbi was first issued shortly
before the takeover of the mainland by
the Communists in 1949. One of the first
tasks of the new communist government
was to end the hyperinflation that had
plagued China near the end of the Kuomintang
era.
During the era of the command economy,
the value of the RMB was set to unrealistic
values in exchange with western currency
and severe currency exchange rules were
put in place. With the opening of the
mainland Chinese economy in 1978, a dual
track currency system was instituted,
with renminbi usable only domestically,
and with foreigners forced to use foreign
exchange certificates. The unrealistic
levels at which exchange rates were pegged
led to a strong black market in currency
transactions.
In the late 1980s and early 1990s,
the PRC worked to make the RMB more convertible.
Through the use of swap centers, the
exchange rate was brought to realistic
levels and the dual track currency system
was abolished.
The RMB is convertible on current accounts,
but not capital accounts. The ultimate
goal has been to make the RMB fully convertible.
However, partly in response to the Asian
Financial Crisis of 1998, the PRC has
been concerned that the mainland Chinese
financial system would not be able to
handle the potential rapid cross border
movements of hot money, and as a result,
as of 2003, full convertibility remains
a distant goal.
Exchange rate of the American
dollar vs. China’s Currency
(Renminbi)
From 1994 until July 2005, the policy
on currency has been to peg informally
the value of the renminbi against the
value of the United States dollar. This
policy was praised during the Asian financial
crisis of 1998 as it prevented a round
of competitive devaluations.
In 2003, this policy came under criticism
by the United States. The fall in the
value of the dollar caused the value
of the renminbi to fall also, making
mainland Chinese exports more competitive.
This led to some pressure on the PRC
from the United States to increase the
value of the RMB in order to encourage
imports and decrease exports. This is
a policy that some feel would preserve
manufacturing jobs in the United States.
The G7 and European Union are also in
favour of a re-evaluation of the exchange
rate.
The PRC government has resisted pressure
to increase the value of the RMB, out
of concern that it would cause mainland
Chinese jobs to disappear and would also
expose domestic banks to currency risks
that they are not prepared to handle.
Many economists believe that only fixed
exchange rates or floating exchange rates
are stable over the long term, because
a one-time change in exchange rates might
cause speculators in the future to take
positions on possible exchange rate fluctuations
which would lead to pressure to completely
float the currency.
The PRC government has also claimed
that, while mainland China runs a large
surplus with respect to the United States,
its overall balance of payments is not
out of balance.
Some independent analysts conclude
that mainland Chinese currency is undervalued,
because the People’s Republic forbids
citizens from moving their currency abroad.
If this sort of financial diversification
were allowed, the massive outflow of
yuan could have a substantial effect
on the currency.
Within the United States, the issue
of appreciating the RMB is also controversial.
Manufacturers and textile producers are
in favor of appreciating the RMB. However,
many American companies that depend on
mainland Chinese factories to supply
inexpensive products and components,
such as aerospace companies, computer
manufacturers, discount retailers, and
other companies are against appreciating
the RMB. Furthermore, many economists
have pointed out that manufacturing jobs
have been declining in the United States
for decades. Some people have suggested
that blaming the lack of job growth on
the value of the RMB is merely a convenient
misdirection on the part of the vested
interests, including the George W. Bush
administration, inefficient businesses,
and labor unions fearful of competition.
Financial consequences of revaluating
or floating China’s Currency
The financial consequences of free
valuation are complicated. Many economists
believe that appreciation of the yuan
would cause the PRC government to buy
fewer United States treasury bonds, causing
bond prices to fall and bond yields to
rise, hampering improvement in the U.S.
economy. The ensuing depreciation of
the US dollar might price oil out of
the reach of the American economy, causing
stagflation, a collapse of US oil dependant
industries, massive unemployment and
other dire economic consequences.
However, the potential risk to global
balances from mainland China’s inflexible
exchange rate would be more critical
if the PRC relaxed its controls on short-term
investment flows without first introducing
exchange rate flexibility. This is because
shifting exchange rates nullify expected
profits from investment flows seeking
to take advantage of higher interest
rates in another country. Without flexibility,
speculative flows could quickly become
large, as they did during the Asian financial
crisis, and threaten economic stability
and orderly world trade.
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This article is licensed under the GNU
Free Documentation License.
It uses some material from
the Wikipedia
article “Renminbi”.