China’s Exchange Rate

1) What should China do to raise the value of its Exchange rate?

The Chinese currency, the Remenbi, is in a managed floating exchange rate system. The government manages its value primarily against the US dollar. Many observers argue that the Renminbi is undervalued by up to 30% against other currencies.

This currency value is maintained by imposing foreign exchange controls. For example, there is a limit to how much foreign currency Chinese residents can buy. Also, China uses its foreign exchange reserves to buy US dollar assets. This reduces value of Chinese currency and increases value of dollar.

To increase the value of the Renminbi the government could decide to revalue the exchange rate and allow its currency to rise according to market demand.

Also higher interest rates, would help increase the value of the Chinese currency. This makes it more attractive for foreign investors to save in Chinese Banks.

Also, keeping inflation low, through higher interest rates and tighter fiscal policy would help appreciate the exchange rate in the long term.

By on June 17th, 2009

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