Impact of the movements of the Yuan on the world

Abstract

On July 21, earlier this year, after over a decade of strictly pegging the Yuan to the U.S. dollar at an exchange rate of 8.28, the People's Bank of China, the Chinese central bank announced a revaluation and a reform of the currency regime. The revaluation has put the value of the Yuan at 8.11 against the dollar, which implies an appreciation of 2.1%. Under the reform, the PBOC will use a "reference basket" of currencies when choosing its target for the Yuan. The revaluation came after intensified pressures from the U.S, which is incurring a huge trade deficit against China, to revalue. According to this announcement, every day the Chinese Central bank will announce its target rate for the next working day on the basis that day's Yuan closing price in terms of a central parity. For instance, the target may be quoted in terms of the value of the Yuan against the dollar. The following day, the Yuan exchange rate will be allowed to move against the dollar within a narrow band of plus or minus 0.3% about the announced central parity. Given the economic significance China occupies due to its role in global trade, and its trade surplus with the United States, it was no surprise that this move sent ripples around the globe. The immediate impact of this announcement was an inflow of hot money into China, in expectation of a further revaluation; a slight strengthening of the Indian Rupee and a decision by Malaysia to shift from a dollar peg to a currency basket system at the same time as the reform of China's exchange rate system. However, after the immediate uproar a worldwide debate started whether this was merely a ‘one-off’ event or is an indication of future change in currency regime. The impact on the global economy would largely depend on the extent of the re-valuation.This Contemporary Concerns Study begins with a theoretical perspective on different currency regime and their significance. Further, this paper attempts to address the issue of whether the revaluation of the Yuan is indeed a policy shift, or merely a political rhetoric. Given that the announcement was made after a prolonged period pf pressure form the U.S for revaluation, it won’t be surprising if it indeed has been done to pacify the U.S andother international proponents of free markets such as the IMF. We have also looked at the possible impact of the re-valuation if this in fact is an indication of a changed regime in the future.. Lastly, we have analyzed this move in the light of a similar experience that Japan had in the 1970s, and enumerated the lessons that this experience has for China, in order for it to avoid a fate similar to Japan’s in the last 25 years.