The Importance of Fixed Exchange Rate to China


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Fixed Exchange rate happen when the country currency the same to other widely use currency. Now a days, dollar is the most common or widely use of currency because every country mostly use dollar for transaction internationally. Other than that, China one of the country that fixed their currency rate especially to their trading partners. This allows China to maintain undervalue of yuan while dollar overvalue, which make their money more appreciate and dollar depreciate.

Yuan exchange rate is important to China is because it can stable their currency. For example, when an investor wants to invest in China, they will know how much to invest, the currency rate as it does not increase or decrease so much. It is also increasing the China economy. Nowadays, China economy of income mostly come from their exports of goods and services to other countries especially United States.

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China once have two different currency which is domestic yuan (the renminbi) and foreign exchange certificate. The Domestic Yuan have a fixed and always decreasing in devalue of yuan from 1.8 to 5.74 while the foreign currency is around 10 yuan for 1 dollar. However maintaining the currency is hard, they decide to combine the currencies in January 1, 1994 and set the rate at 8.7 yuan per dollar. The Yuan rate then remained fixed until May of 2005. When the Central Bank decides to change the currency policy during the liberal state, they use the narrow trading band from +/-0.3% to +/-2% by March of 2014. In February, 2018, the value of Yuan is 6.2645 to 1 dollar. China keeps the value fixed to U.S dollar and assure the dollar will be pay of 6.26 Yuan to holder redeems. Other country including United States use the floating exchange rate while China uses a modified version of the traditional exchange rate.

Their Yuan rate on the other currencies will reflect back to the trading partners which is one of them are China biggest trader, United States. The value was around 2% against the other currencies. They are able to handle the price control through the export. China top and biggest exports are to United States like electronics, clothing, machinery and others. There were occasion where the U.S Company will send raw materials to China for the low cost labor and assemble but the finished good then will be import back to United States. This shows the China’s profit on the United States Company through the U.S trade that will deficit each year.

Most of China Company’s income is from the export of United States in dollar. The companies then will use the money to exchange in Yuan and deposit it to bank to pay their workers. This will allow the bank to send dollar to China central bank, which will reduce the supply of dollar for other trading and lower the value of Yuan or appreciate the Yuan also depreciate the Dollar.

As for 2017, the United States trade shortfall is 375 billion dollar because they only export to China around 130 billion dollar whole import were 506 billion dollar. The debt is much higher than the income. As world biggest economy, China has almost 1.4 billion citizens that have GDP of 16,600 dollar in 2017. Their leaders are trying to increase the standard living there by making their economic grow faster. China fixed the currency rate to dollar using a modified traditional fixed exchange rate so that when dollar is depreciated, they can buy dollar. China influence on United States dollar is strong as they decide to fix the yuan rate which gives a strong effect to the value of yuan.

This way they can trade their good to United States or other country using dollar then converted it back to Yuan which make the supply of dollar increase and the pressure of it will depreciate dollar while appreciate yuan. They also will use dollar to pay for their workers in yuan that will devalue the rate of yuan also.

The United States debt to China is 1.18 trillion dollar in May 2018. Most of it, 19%, comes from the debt owned by the foreign countries. If China want to take over the U.S fiscal policy politically, this would trouble other countries because it would crash down the market if China decide to start selling U.S Treasury or stop buying it all at once. China also will help in keeping U.S interest rate low if they decide to sell it, the rates would increase and United States will be in recession. China also wants to save their selves, if U.S in recession, their citizen would stop buying their products and their income will be low on China.

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