FOSTIIMA Business School

Presented by:
Alok Kumar
Aparna Raghav
Neeraj Chaudhary
Neeraj Kumar
Preety Yadav
FOSTIIMA Business School
 GDP OF CHINA
§ World's second largest economy by both nominal
GDP ($4.99 trillion in 2009) and by purchasing
power parity($8.77 trillion in 2009)
§ World's fastest-growing major economy, average
growth rate of 10% for the past 30 years
§ The country's per capita income was at
6,567RMB(IMF, 98th) in 2009. China is also the
second largest trading nation
§ largest exporter and second largest importer of
goods

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GDP OF CHINA

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CHINA’A EXPORT & IMPORT TO THE
WORLD ($ BILLION )

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(BOP)CURRENT A/c BALANCE
($ BILLION)

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MAJOR TRADE PARTNERS OF CHINA

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 CHINA’s CURRENCY
§ Renminbi (Chinese meaning: "people's currency”)
§ Monetary authority: The People's Bank of China
§ Paper money comes in 1 Fen, 2 Fen (rare), 5
Fen(very rare), 1 Jiao, 2 Jiao, 5 Jiao, 1 Yuan, 2
Yuan, 5 Yuan, 10 Yuan, 20 Yuan, 50 Yuan and
100 Yuan
§ One Yuan is divided into 10 Jiao(Mao)
§ One Jiao is divided into 10 fen
§ The largest denomination :100 Yuan note
§ The smallest denomination: 1 Fen coin or note

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ECONOMIC REFORMS IN CHINA(1990)
§ Top priority was the industrialization (including
military industry)
§ Privatization was given preferences
§ The private sector grew remarkably, accounting for
as much as 70 percent of China's GDP by 2005
§ Set up 2 stock exchanges in 1991
§

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 CHINA’S FOREX REFORM
1949-1978: Planned Economy
§ A highly centered, planning system was
implemented
§ Bank of China was the only specialized bank
involving in foreign exchange business
§ Any purchase of foreign exchange should
be included in the state plan
§ The nation never incurred foreign borrowings or
allowed foreign direct investment.

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 1979-1993:TRANSITIONAL PERIOD
§ The State Administration of Foreign Exchange,
under the leadership of the People’s Bank of
China, was established
§ The enterprises were permitted to retain a portion
of their foreign exchange earnings.
§ The RMB exchange rate regime was reformed.
§ Various financial institutions were allowed to
involve in foreign exchange business
§ Restrictions on domestic individuals’ foreign
exchange receipts were relaxed.

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 EXCHANGE REGIME AFTER 1994
§ In 1994, China realized RMB conditionally
convertible under current account transactions.
§ A system of purchasing and surrendering foreign
exchange through designated foreign exchange
banks was formed.
§ A nationwide, unified and standard inter - bank
foreign exchange market, i.e. China Foreign
Exchange Trade System(CFETS) was
established.

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 CONT..
§ Domestic enterprises that meeting some
conditions was allowed to open settlement foreign
exchange account to keep export receipts within
the upper limit set by SAFE
§ On December 1st, 1996, China officially accepted
the obligations of Article VIII of the IMF Articles
of Agreement and made the RMB fully
convertible for current account transactions

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 TYPES OF EXCHANGE RATE
1. Fully fixed exchange rates
2. Semi-fixed exchange rates
3. Free floating
4. Managed floating exchange rates
5.
6.
7.

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 TYPES OF EXCHANGE RATE

1.Fully fixed 2. Semi-fixed

exchange rates exchange rates

grange,
on its behalf)
but the intervenes
exchange rate
in the
is the
currency
dominant
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target
in order
of economi
to kee

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 TYPES OF EXCHANGE RATE

3.Free floating 4.Managed floating

gn exchange market. Consequently, trade flows and capital flows

y's exchange rate is not pegged, but the monetary authorities tr
.

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 OBJECTIVE OF MANAGEMENT
§ Economic growth
§ Confidence of the investors
§ Over all economic growth
§ Stable currency (Reducing the Exchange Risk)
§ Focus on the Growth Engine (Export)
§
§
§
§
§
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 PPP
United States China($1=6RMB)

Cost of the Laptop :$10

Cost of the Laptop :48 RMB($8)
Imported : $9
(Undervalued currency helps in expor

Continues till the prices in both the countries are the same
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 FACTORS EFFECTING THE
EXCHANGE RATE
1. Inflation
2. Interest rate
3. Foreign Currency Inflows
4. FDI

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 INFLATION
Relation between Inflation and Value of the
Currency

CURRENCY VALUE

INFLATION

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INFLATION IN CHINA

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CURRENCY EXCHANGE RATE

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Source: X-Rates.com
INTEREST RATE

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CURRENCY EXCHANGE RATE

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Source: X-Rates.com
 FOREIGN CURRENCY INFLOW
Relation between Foreign currency inflows and
Nation’s Currency Value

CURRENCY VALUE

FDI

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FDIs IN CHINA

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CURRENCY EXCHANGE RATE

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Source: X-Rates.com
TRADE BALANCE WITH U.S

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Yuan per
Dollar
Chinese Reserve
Accumulation

Supply for
Dollar
Peg

Demand for Dollar

How does Chinese Currency Peg works

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 CURRENT A/c BALANCE
§ CAB tells us if a country has deficit or a surplus
§ Components of the CAB:
§ Goods: Movable and physical in nature general
merchandise, goods used for processing other
goods, and non-monetary gold
§ Services: Intangible action such as tourism
transportation, business services, royalties or
licensing
§ Income: Include salaries, portfolio investments
(form of dividends), direct investments or any
other type of investment.

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CONT..
§ Current Trnasfers: Include workers' , aids
and grants remittances, donations, official
assistance and pensions
§ Calculation of the CAB
§ CAB = X - M + NY + NCT
§ X = Exports of goods and services
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers
§ A surplus is indicative of an economy that is a net
creditor to the rest of the world
§ A deficit reflects an economy that is a net debtor to the
rest of the world
§
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 CHINA’s SHIFT FROM $ TO £
§ The nation has been buying “quite a lot” of
European bonds.
§ The nation cut its holdings of U.S. government
debt by $72.2 billion, or 7.7 percent, through
May from last year’s record of $939.9 billion in
July 2009.

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 KEY CHELLANGES FOR CHINA
1. Maintaining a gradual pace of currency reform
while trying to use monetary policy as an
effective instrument of macroeconomic
management
2. Reducing excessive reliance on external demand
to sustain economic growth
3. Preventing the defense of the present currency
regime from handicapping unduly efforts to
strengthen and transform the banks into truly
commercial entities
4. Containing the risk of protectionism abroad in
response to China’s very large global current
account surplus FOSTIIMA Business School
CONCERS WITH CHINA & U.S

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 CORE U.S. TRADE POLICY GOALS
§ Improved market access in China for U.S. goods,
services & investment to address imbalances in

the bilateral relationship

§ Modification of Chinese policies that “unfairly”
advantage Chinese suppliers of goods &
services in China, the U.S and other markets
§ Improved enforcement of intellectual property
rights and product safety, environment and
labor standards in China
§
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 U.S. PERSPECTIVE
Four Underlying Causes of Frictions:
1. Chinese Macroeconomic Policies Leading to
Unbalanced, Resource-intensive, Export-oriented
Growth
2. Chinese Policies Supporting Nationalistic and
State-led Economic Development
3. Systemic Weaknesses Related to China’s Current
Level of Economic Development
4. Weaknesses in Accountability, Transparency and
Rule of Law Related to China’s Political System
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 CONCLUSION
§ Healthy and sustainable U.S.-China economic
relations are critically important to both
countries
§ Each country must make judgments about
changes, if any, needed to make the
relationship work and be prepared to pay the
price necessary to reach agreement
§ Significant frictions arise in the bilateral economic
relationship due to differences in: Macroeconomic

policies, Industrial policies, levels of economic

development FOSTIIMA Business School
§
Thank You

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