According to Goodhart and Xu (1996, p.24) China had a dual exchange rate system: official artificially high value of RMB, and its lower value in the swap market, and these two markets were unified on January 1, 1994.
The analysis by Goldstein (2003) regarding China’s currency regime resulted in five conclusions:
- Chinese RMB is under-valued within 15-25 percent range. This is resulted by China maintaining controls on capital outflows, running surpluses on overall current and capital accounts in its balance of payments and accumulating international reserves in large amounts.
- The revaluation of RMB will benefit China and the global economy, otherwise net capital inflows and the large accumulation of international reserves will continue.
- Adopting a flexible exchange rate and opening its capital market will benefit China, but the economy is not ready for this.
- China should be persuaded to change its exchange rate policy, and trade measures should be imposed against China’s exports by United States.
- The effect of medium-size revaluation of RMB within external accounts of US must not be exaggerated.
Wu (2006, p.3) argues that before revaluation of RMB 2 per cent in 2005 The People Bank of China had four options to consider as its short-term policy options:
Option 1: Increasing the supply of money without revaluing the RMB. This option would have contradicted the macroeconomic objectives of The People’s Bank of China
Option 2: Waiting for the tightening of the Federal Reserve without revaluing the RMB.
Option 3: Aiming to lower revaluation expectations tightening macroeconomic environment, without revaluing RMB.
Option 4: Revaluing the RMB
Marsh and Diaz (2008, pp.2-4) suggest following forecast methods to forecast the exchange rate of a currency for a future period:
- Technical forecast method. This method involves analysing relevant historical data with the aim of forecasting future trends in exchange rate adjustments. Technical forecast method is not totally reliable on its own as it does not take into account a range of possible factors likely to affect the exchange rate. However, this method can be effectively used together with other methods.
- Market Forecast Method. This method is based on comparing the relative risk free rates of return between economies to estimate expected change and expected exchange rate for the future period.
- Fundamental Forecast Method involves analysing how certain economic variables are going to affect the exchange rate between the currencies of two countries.
- Mixed Forecasting Method combines all other forecasting methods mentioned above, therefore, produces the most reliable results.
The data in the following table were calculated by Marsh and Diaz (2008, p.14) using their Mixed Forecasting Method.
|Real GDP growth (%)||9.8||8.5||8.7||8.6||8.4||8.2|
|Consumer Price inflation (%; av)||6.4||4.1||4||4.2||4.1||4.1|
|Budget balance (% of GDP)||0.4||0.4||0.5||0.4||0.4||0.5|
|Current-account balance (% of GDP)||8.5||6.6||5.7||4.5||3.4||2.6|
|Commercial bank prime rate (%; year-end)||7.2||7.5||7.7||8.1||8.1||8.1|
|Exchange rate RMB:USD (av)||6.94||6.74||6.53||6.4||6.31||6.25|
|Exchange rate RMB:¥100 (av)||6.55||6.54||6.65||6.75||6.73||6.67|
Source: Marsh and Diaz, 2008
- Goodhart, C, Xu, C, 1996, “The Rise of China as an Economic Power”, National Institute Economic Review, Issue:155
- Goldstein, M, 2003, “China’s Exchange Rate Regime”, Testimony before Subcommitee on Domestic and International Monetary Policy, Trade, and Technology Committee on Financial Services U.S House of Representatives
- Marsh, S, Diaz, E, 2008, “Chinise RMB vs. US Dollar” International Financial Management
- Wu, Y, 2006, “The RMB Exchange Rate and Monetary Sterilisation in China”, China: An International Journal, vol.4