China Foreign Exchange Market
China exchange market has undergone massive development through various phases. The primary currency, renminbi or yuan is used in the foreign exchange market, and for many years, the static system was favored over the new managed floating system (Yuqing, 2006). Historically, the days when the exchange method was pegged on the fixed exchange rate, the renminbi changed against other currencies based on various fiscal policies (Xiangqian et al., 2005). In an attempt to determine the key objective of the paper, it is vital to comprehend the China currency policy. It is essential to understand this concept since it helps in identifying the factors that influence the changes in the foreign exchange rate in China (Xiangqian et al., 2005). Factors that affect the China exchange rate encompass interest rate differential, inflation rate differential, exchange rate reserve, and money supply. Thus, China foreign exchange market forms the central theme of this discussion.
China’s Currency Policy
The foundation of China’s foreign fiscal policy is to address the yuan exchange rate efficiently to manage the economy. Reports have shown that China did not have the free foreign change policy that most developed nations have (Yuqing, 2006). Nonetheless, the renminbi was pegged to the United States dollar at a figure of 8.28 for ten years right from 1994 (Xiangqian et al., 2005). Pressure from different trade partners made the renminbi to strengthen by 2.1 percent in 2005. This made the yuan in the foreign exchange market to shift to a more floated system against the US dollar. During the global financial crisis that ravaged many countries, China lowered the yuan appreciation in 2008 due to reduced global demand for their products (Xiangqian et al., 2005). Primarily, the real value of the yuan is tough to determine because many scholars indicate an array of undervaluation where some people value it at 3 percent while others value it to extreme ends of 45 percent (Xiangqian et al., 2005). However, the real value of yuan is undervalued. Importantly, China achieves this value by pegging the yuan to the United States dollar at daily reference rate regulated by the People’s Bank of China, which is the central bank in the country (Yuqing, 2006). Yuan may hugely appreciate against the dollar when left to float uncontrolled (Xiangqian et al., 2005). In the short run, China caps the appreciation by buying the US dollar then sells the renminbi. This short- term inexorable accretion of the United States dollar results to increased foreign exchange reserve.
Changes in the Exchange Rate
The foreign exchange rate contributes considerably to an economy of a nation, and its fluctuation can influence a country’s economy and foreign trade, or solely international economy. A gap in trade creates a scenario where the value of the currency depreciates then it lowers both national income and aggregate demand (Xiangqian et al., 2005). Various pieces of literature have suggested that a currency fall may affect the state of the stock markets, predominantly in the export-based nations in an adverse manner (Yuqing, 2006). It may affect the stock market of the import-overriding country in a positive trend. For instance, the J-curve model is instrumental and shows that the balance exhibited in trade depreciates shortly, but shall increase in the long run, mainly after the situation of exchange rate enhancement (Xiangqian et al., 2005). Changes in the foreign currency rate are brought by these factors discussed below.
China’s Foreign Exchange Reserve
Source: People’s Bank of China
Money supply in a vital factor that hugely influences the value of a currency when inappropriately managed. Majorly, equilibrium within the exchange rate is reached when the demand and the supply of the foreign money equals the foreign currency rate. Also, money supply may make the foreign currency rate more volatile (Xiangqian et al., 2005). In this case, increased supply of the dollar makes the dollar itself to depreciate whereas the value of renminbi tends to appreciate in this kind of the scenario. When no equilibrium is attained in the supply and demand of the particular currency, the value of the U.S dollar will slightly depreciate (Xiangqian et al., 2005). Thus, money supply is a key factor that hugely determines the value of yuan against other major world currency in the foreign exchange market. China works around the clock to regulate money supply in a bid to strengthen the economy and makes the value of renminbi stronger (Chinn 2006).
Interest Rate Differential
In the recent years, Chinn (2006) explored the relationships between U.S dollar rate and yuan exchange rate based on various interest rates executed by the government. The report showed that higher interest rates lead to the appreciation of the local currency rate. The banking industry contributes hugely to economic growth of any country. A considerable increase in interest rates allow the banks to offer people loans and other individuals can also take loans to start up small business, which shall strengthens the economy and makes the value of the yuan to grow stronger (Xiangqian et al., 2005). Low-interest rates make the banks and other financial institutions to dismiss the loan process, and the economy may experience a recession that shall make the value of the yuan to depreciate (Yuqing, 2006). In conformity with the studies highlighted in Chinn (2006), higher interest rates make the domestic currency to strengthen against the U.S dollar (Xiangqian et al., 2005). The key premise here is that interest rates differential affects the value of yuan against the dollar. Thus, interest rate differential is a key determinant that changes the value of the yuan against other world major currencies. Subsequently, a higher interest rate between the United States and China leads to reduced yuan exchange against the dollar hence the value of yuan appreciates (Xiangqian et al., 2005).
Foreign Exchange Reserves
The Foreign reserve is another key factor that changes the value of yuan in the foreign exchange market. Foreign reserve forms a vital aspect of the currency market analysis as well maintaining the stability of the currency in the economy (Xiangqian et al., 2005). Largely, a currency either is deemed stable or not by gauging the magnitude of the liquidity of that particular currency reserve. In China, there exist a significant association between foreign reserve and the exchange rate (Xiangqian et al., 2005). Thus, a surge in the comparative balance of foreign exchange reserve might reduce the standard currency exchange rates. This depicts that foreign reserve is a vital factor in predicting the value of yuan against the dollar and other major currency in China foreign exchange market (Yuqing, 2006). In perspective, a higher foreign reserve balance China results to reduced exchange of yuan against the dollar and this makes the value of the renminbi to appreciate (Yuqing, 2006). The government is often vigilant with maintaining the foreign exchange reserves at adequate levels in a bid to monitor the value of yuan against the dollar.
Inflation Rate Differential
From the purchasing power parity (PPP) model, an exchange rate refers to the ratio of numerous price levels between nations for instance, the U.S and China when compared. In a some scenario, the value of yuan and U.S dollar can be established by considerable differences that occur between the purchasing power of both currencies. In addition, the buying power can also show the price ranges in both nations. Comparative PPP denotes foreign exchange rate by regarding various inflation figures. Precisely, higher inflation rates lead to a significant depreciation of a given currency (Chinn 2006). This infers that an inflation rate is a key determinant in predicting the value of the renminbi against the U.S dollar and other major world currencies in China foreign exchange market. In perspective, higher inflation rate differential in both nations leads to more yuan exchange against the U.S dollar hence depreciating the value of the yuan (Chinn 2006).
This paper successfully discusses the fundamental thesis of this study about China foreign exchange market China has strict fiscal policy that ensures the foreign exchange market remains strong. From the historical developments, China has enacted numerous fiscal changes in its foreign exchange market in the bid to strengthen the yuan against the dollar and another major world currency. Furthermore, stronger yuan in the foreign exchange market assists the financial institutions and various multinational firms to reduce the foreign exchange rate improbability. China employs short-term measures such as buying the dollar and selling the yuan to help maintain the exchange the rate. Finally, the changes in the foreign exchange rate are brought by interest rate differential, money supply, and currency reserve.
Chinn, M. D. (2006). A primer on real effective exchange rates: Determinants, overvaluation, trade flows and competitive devaluation. Open economies review, vol. 17(1), p.115-143.
Xiangqian, L., & Guoqiang, D. A. I. (2005). The Influence of Fluctuation of Real RMB Exchange Rate to Chinese Import and Export: 1994—2003. Economic Research Journal, vol. 5(003), p. 35-45.
Yuqing, X. I. N. G. (2006). Why is China so attractive for FDI? The role of exchange rates. China Economic Review, vol. 17(2), p. 198-209.
China Foreign Exchange Market (CXM) ni soko la fedha za kigeni ambalo limekuwa likikua kwa miaka mingi. Kwa mfano, kwa mwaka wa 2006, yuan ilitumiwa katika soko la fedha za kigeni, na kwa miaka mingi, mfumo wa kudumu ulipendekezwa juu ya mfumo mpya wa kuelea uliodhibitiwa. Kwa mfano, wakati wa mabadiliko ya fedha, kiwango cha renminbi kilibadilika kwa kila sarafu, na kwa kila sarafu, kiwango cha fedha cha China kilibadilika. Katika jaribio la kuamua lengo kuu la karatasi, ni muhimu kuelewa sera ya fedha ya China. Ni muhimu kuelewa dhana hii kwa sababu inasaidia katika kutambua sababu ambazo zinaathiri mabadiliko katika kiwango cha fedha za kigeni nchini China (Xiangqian et al., 2005). Vitu vinavyoathiri kiwango cha ubadilishaji wa China ni tofauti ya kiwango cha riba, tofauti ya kiwango cha mfumuko wa bei, akiba ya kiwango cha ubadilishaji, na usambazaji wa pesa. Hivyo, soko la fedha za kigeni la China hufanyiza mandhari kuu ya majadiliano haya. China's Currency Policy Msingi wa China's kigeni sera ya kifedha ni kushughulikia yuan kiwango cha ubadilishaji ufanisi kusimamia uchumi. "Hata hivyo, ripoti hiyo imesema China haikuwa na sera ya ""huru ya kubadilishana fedha za kigeni"" kama nchi nyingi zilizoendelea (Yu Qing, 2006)." Hata hivyo, kwa miaka kumi tangu mwaka wa 1994, yuan ilishikamana na dola ya Marekani kwa kiwango cha 8.28 (Xiangqian et al., 2005). Mfumo wa biashara wa China ulifanya renminbi kuimarika kwa asilimia 2.1. Hii ilifanya yuan katika soko la fedha za kigeni kuhamia mfumo wa kuelea zaidi dhidi ya dola ya Marekani. Wakati wa mgogoro wa kifedha wa kimataifa, China ilishusha thamani ya yuan mnamo 2008 kwa sababu ya kupunguzwa kwa mahitaji ya kimataifa ya bidhaa zao. "Kwa kweli, thamani halisi ya Yuan ni ngumu kuamua kwa sababu wasomi wengi wanaonyesha ""mfululizo wa undervaluation"" ambapo baadhi ya watu thamani yake katika 3%, wakati wengine thamani yake kwa mwisho wa 45%. """ Hata hivyo, thamani halisi ya yuan imepunguzwa. China inapata thamani hii kwa kuunganisha yuan kwa dola ya Marekani kwa kiwango cha kila siku cha kumbukumbu iliyopangwa na Benki ya Watu wa China, ambayo ni benki kuu nchini (Yu Qing, 2006). Yuan inaweza kuwa na thamani kubwa dhidi ya dola wakati inaachwa kuelea bila kudhibitiwa (Xiangqian et al., 2005). Kwa muda mfupi, China inashughulikia thamani ya dola ya Marekani kwa kununua dola ya Marekani na kuuza renminbi. Ongezeko hilo la muda mfupi lisilo na kikomo la dola ya Marekani husababisha ongezeko la akiba ya fedha za kigeni. Mabadiliko katika kiwango cha fedha za kigeni huchangia sana uchumi wa taifa, na kutofautiana kwake kunaweza kuathiri uchumi wa nchi na biashara ya nje, au uchumi wa kimataifa tu. "Kutoka kwa hali hiyo, uchumi wa nchi huanza kuanguka, na kwa hivyo, ""kiwango cha uchumi cha nchi"" huongezeka, na ""kiwango cha uchumi cha nchi"" huongezeka, na ""kiwango cha uchumi cha nchi"" huongezeka, na ""kiwango cha uchumi cha nchi"" huongezeka (Xiangqian et al., 2005)." "Kama ilivyoelezwa katika makala kadhaa, ""mashine ya fedha inaweza kuathiri hali ya masoko ya hisa, hasa katika nchi zinazotegemea mauzo ya nje kwa njia mbaya"" (Yu Qing, 2006)." Inaweza kuathiri soko la hisa la nchi inayopitia uagizaji katika mwelekeo mzuri. Kwa mfano, mfano wa J-curve ni muhimu na inaonyesha kwamba usawa ulioonyeshwa katika biashara hupungua kwa muda mfupi, lakini utaongezeka kwa muda mrefu, hasa baada ya hali ya kuboresha kiwango cha ubadilishaji (Xiangqian et al., 2005). Mabadiliko katika kiwango cha fedha za kigeni huletwa na mambo haya kujadiliwa hapa chini. China Foreign Exchange Reserve (CFR) ni sarafu ya fedha ya China, ambayo ni moja ya sababu za msingi za thamani ya fedha ya China wakati haijasimamiwa vizuri. Kwa kawaida, usawa ndani ya kiwango cha ubadilishaji hufikiwa wakati mahitaji na usambazaji wa fedha za kigeni ni sawa na kiwango cha fedha za kigeni. Pia, usambazaji wa fedha unaweza kufanya kiwango cha fedha za kigeni kuwa na kubadilika zaidi (Xiangqian et al., 2005). Katika hali hii, ongezeko la usambazaji wa dola hufanya dola yenyewe kupunguzwa thamani wakati thamani ya renminbi inaelekea kuthamini katika aina hii ya hali. Wakati usawa haujapatikana katika utoaji na mahitaji ya sarafu fulani, thamani ya dola ya Marekani itapungua kidogo (Xiangqian et al., 2005). Kwa hivyo, usambazaji wa pesa ni sababu muhimu ambayo huamua sana thamani ya yuan dhidi ya sarafu nyingine kuu ya ulimwengu katika soko la fedha za kigeni. China inaendelea kufanya kazi kwa saa 24 ili kudhibiti usambazaji wa fedha katika jaribio la kuimarisha uchumi na kufanya thamani ya renminbi kuwa imara zaidi. Chinn (2006) alielezea uhusiano kati ya kiwango cha dola ya Marekani na kiwango cha kubadilishana cha yuan kulingana na viwango mbalimbali vya riba vilivyotumiwa na serikali. Ripoti hiyo ilionyesha kwamba viwango vya juu vya riba husababisha thamani ya kiwango cha sarafu ya ndani. Sekta ya benki inachangia sana ukuaji wa kiuchumi wa nchi yoyote. Kuongezeka kwa kiwango cha riba kwa benki kunaruhusu watu kutoa mikopo na watu wengine wanaweza pia kuchukua mikopo ili kuanzisha biashara ndogo, ambayo itaimarisha uchumi na kufanya thamani ya yuan kukua kwa nguvu (Xiangqian et al., 2005). "Masharti ya chini ya riba ya fedha ya China, ambayo ni ya chini ya kiwango cha riba, inaweza kusababisha benki na taasisi nyingine za kifedha kukataa mchakato wa mkopo, na uchumi unaweza kupata mfumuko wa uchumi ambao utafanya thamani ya yuan kupungua "" (Yu Qing, 2006)." Kwa mujibu wa utafiti uliotajwa katika Chinn (2006), viwango vya juu vya riba hufanya sarafu ya ndani kuimarisha dhidi ya dola ya Marekani (Xiangqian et al., 2005). Dhana muhimu hapa ni kwamba tofauti ya viwango vya riba huathiri thamani ya yuan dhidi ya dola. Kwa hivyo, tofauti ya kiwango cha riba ni sababu muhimu ambayo hubadilisha thamani ya yuan dhidi ya sarafu zingine kuu za ulimwengu. Kwa hivyo, kiwango cha riba cha juu kati ya China na Marekani kinasababisha kubadilishana kwa yuan dhidi ya dola, na kwa hivyo thamani ya yuan inathaminiwa. Hifadhi ya fedha za kigeni ni moja ya sababu kuu ya thamani ya yuan katika soko la fedha za kigeni. Fedha za kigeni ni muhimu kwa ajili ya uhifadhi wa fedha za kigeni na pia kuimarisha utulivu wa fedha katika uchumi (Xiangqian et al., 2005). Kwa ujumla, sarafu huonwa kuwa imara au sio kwa kupima ukubwa wa uwiano wa akiba hiyo maalum ya sarafu. Katika China, kuna uhusiano mkubwa kati ya akiba ya kigeni na kiwango cha ubadilishaji (Xiangqian et al., 2005). Hivyo, kuongezeka kwa usawa wa kulinganisha wa akiba ya fedha za kigeni kunaweza kupunguza viwango vya kawaida vya ubadilishaji wa sarafu. "Hii inaonyesha kwamba akiba ya kigeni ni sababu muhimu katika kutabiri thamani ya yuan dhidi ya dola na fedha nyingine kuu katika soko la fedha za kigeni la China. """ Kwa upande mwingine, China inaendelea kuimarisha fedha za kigeni kwa sababu ya kuongezeka kwa thamani ya yuan dhidi ya dola ya Marekani, na kwa sababu hiyo, thamani ya yuan ya China inaongezeka. Serikali ya China pia inahakikisha kuwa akiba ya fedha za kigeni iko katika kiwango cha kutosha ili kufuatilia thamani ya yuan dhidi ya dola. Kiwango cha Fedha: Katika mfano wa PPP (Uwezo wa Kununua) kiwango cha fedha ni kiwango cha bei kati ya nchi mbili, kwa mfano, Marekani na China. Kwa mfano, thamani ya yuan inaweza kutegemea tofauti kubwa kati ya nguvu za ununuzi za sarafu zote mbili. Kwa kuongezea, uwezo wa kununua unaweza pia kuonyesha viwango vya bei katika mataifa yote mawili. PPP ya kulinganisha inaonyesha kiwango cha ubadilishaji wa kigeni kwa kuzingatia takwimu mbalimbali za mfumuko wa bei. Kwa kweli, viwango vya juu vya mfumuko wa bei husababisha kupunguzwa kwa thamani kwa sarafu fulani (Chinn 2006). Hii inamaanisha kuwa kiwango cha mfumuko wa bei ni muhimu katika kutabiri thamani ya renminbi dhidi ya dola ya Marekani na sarafu nyingine kuu za dunia katika soko la fedha za kigeni la China. Kwa mfano, kiwango cha mfumuko wa bei cha juu katika nchi zote mbili husababisha kubadilishana zaidi kwa yuan dhidi ya dola ya Marekani, na hivyo kupunguza thamani ya yuan. "Hii ni kwa sababu ya ""mfano wa msingi"" wa soko la fedha za kigeni la China, ambayo ina sera kali ya kifedha ambayo inahakikisha soko la fedha za kigeni linabaki kuwa na nguvu." China imefanya mabadiliko mengi ya kifedha katika soko lake la fedha za kigeni katika jaribio la kuimarisha yuan dhidi ya dola na sarafu nyingine kuu ya dunia. Kwa kuongezea, yuan yenye nguvu katika soko la fedha za kigeni husaidia taasisi za kifedha na makampuni mbalimbali ya kimataifa kupunguza uwezekano wa kiwango cha fedha za kigeni. China inatumika hatua za muda mfupi kama vile kununua dola na kuuza yuan kusaidia kudumisha kiwango cha kubadilishana. Mwishowe, mabadiliko katika kiwango cha fedha za kigeni huletwa na tofauti ya kiwango cha riba, usambazaji wa pesa, na akiba ya fedha. Chinn, M. D. (2006). 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