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Abstract

China has revaluated its currency in July 2005. It sent a ripple of quest across the world regarding what effect it will have on Chinese economy and financial market. How USA is going to get affected after China has removed the pegging? This paper discusses the effect of "Yuan Revaluation" on China, USA and India.
How theses countries are going to get benefited or losing some of the advantages that existed before the step of unpegging the currency was taken is discussed on macro level.

The article will discuss the possible outcome of "The Yuan Revaluation" from China, US and India perspective and how China managed a fine balancing act.

The Impact of Yuan Revaluation

On July 21, 2005, China abandoned the 11-year peg of its currency, Yuan, at RMB 8.28 to the dollar. From now on, the Yuan will be linked to a basket of currency (write currency and number of currency), the central parity of Yuan is decided to set at the end of each day. The Yuan central rate was devalued by 2.1% at RMB 8.11 (far lesser than what the actual value should be). The new exchange-rate regime might prove taxing to the Chinese firms but would help to control the over-heated Chinese economy, the burgeoning US trade deficit and asset pricing bubble.

Brief History

The Yuan has been pegged to US dollar since Jan'1994 when China adopted a new managed floating rate regime within narrow band. Under this Chinese Central Bank (the People's Bank of China) unified rate for all authorized foreign transaction at RMB 8.7 per dollar. The rate was flexible to adjust within a narrow band of 0.25% of previous day's reference date. The Yuan began to appreciate in the year '94 and for the first time in May 1995 touched RMB 8.3 per dollar (5% increase) and remained around the same value for next two years finally appreciating to RMB 8.21 per dollar and had been maintained till it was pegged to a basket of currency.

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* Contributed by -
Jyoti Singh,
PGDBM 2006,
IMT, Ghaziabad.