Chinese Currency Exchange Rate: Policy, Government Control, Political Influences And Factors Affecting The Value Of The Yuan (Renminbi)
What is the currency of China?
The Chinese (rmb) currency or renminbi is the official currency of China. It is also known as the Yuan. Up until recent times, the Chinese currency exchange rate has been fixed by the Chinese Central Bank (Peoples Bank of China). Following broad economic reforms, on July 22 2005, the Central Bank revalued Chinas currency 2.1 per cent against the US dollar from 8.110 to 8.25 dollars. The central bank has also abandoned the peg to the US dollar in favor of a basket of currencies. The currency is now effectively a managed float as opposed to a fixed exchange rate and the revaluation of the Chinese Yuan is set to continue in line with Chinese policy directives.
The argument put forward by US and economic politicians and commentators is that the Chinese maintain an unfair economic advantage by maintaining an artificially low currency exchange rate. The huge foreign currency reserves carried by China is put forward as evidence that an artificially low exchange rate provides Chinese manufactures with a distinct price advantage in worldwide markets and is reflected in the Chinese trade balance. China recognizes the need to adopt a more freely floating exchange rate but is making sure that it manages the transition.
The new Central Bank initiatives provides a 0.3% revaluation buffer against the US dollar to prevent any attack on the currency and to give the Chinese Central Bank time to adjust. Undoubtedly the Chinese want to control their export competitiveness and limit any detrimental effects of inflation. They recognize the gradual need to allow the Chinese currency exchange rate to rise but in traditional policy style, Chinese currency control is designed to slowly accomplish objectives to mitigate any associated risks that would result from a free float and drastic revaluation.
The effect of the China currency control now provides a better way to manage the exchange rate by pegging to a basket of currencies. Although the exact composition of the basket has yet to be disclosed, it is widely believed to by similar to the setup used by Singapore where it manages its currency by allowing it to fluctuate against a group of the nations major trading partners. Amongst the most likely included currencies would be the yen, dollar and euro. A group of currencies provides a better insulation from the macroeconomic factors affecting any one currency such as the current decline in the US dollar.
The gradual revaluation of the Chinese current currency exchange rate has prompted some prominent investors to consider the Chinese currency as a great investment opportunity. Everbank (www.everbank.com) provide a Worldcurrency Access deposit account for US residents and handles all the Chinese currency conversion. These accounts are FDIC insured and carry a minimum deposit opening account of $2500. You can also invest or trade the Wisdom Tree Dreyfus Chinese Yuan Currency income ETF which was launched in May 2008.
