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Although the regime was known as market driven managed float, it was de facto pegged to dollar since '94.
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Currency Evaluation
The Goal
Under a "float", which China says it wants someday, a currency rises and falls on global markets according to supply and demand. This is the system that applies to many major currencies such as the US Dollar, the Euro and the British Pound.
The Old System
Under a "peg", which China has had since 1995, the currency's value is fixed - in China's case, at 8.28 Yuan per US Dollar.
The New System
Under a "managed float", which China adopted in July' 05, the currency can rise and fall but only within prescribed limits.
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The Controversy
The hue and cry for revaluation of Yuan was primarily because of following reasons: -
In PPP terms, Yuan is substantially under-valued. The Big Mac index assesses Chinese currency as undervalued by 59% in the release of Jun 9, 2005.
One fourth of the US trade deficit (which was shot upto US$ 600 bn, 5% of US GDP). Given the extravagant life style of Americans, social security proposal, prospect of continued increasing outlays because of rising tension with North Korea, Syria and Iran, the US budget deficit is expected to inflate. Appreciation of Chinese currency is expected to curb this deficit up to some extent, if not completely.
Given the healthy Balance of Trade, Balance of Payments, FDI, Exchange Reserves, GDP growth in last few years, Yuan has become stronger along with Chinese economy and demand for its currency has also improved.
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* Contributed by -
Jyoti Singh,
PGDBM 2006,
IMT, Ghaziabad.
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