the Chinese Yuan
Oh yeah, China finally decided to stop its currency peg with the US dollars. Ok, I guess to many of us, what exactly is the big hoo-hah about it? Yes, all of us have read in the news about how under-valued the yuan has been against the greenback, and we all know about how much the Americans have protested about the Chinese refusal to revalue the currency. But so? A meager rise of 2% does not change much of the current economic climate, and it does little to improve current economic conditions since the yuan is estimate to be 10-20% undervalued against the yuan. Indeed, the 2% rise does look insignificant.
But the truth is, there are a lot of implications due to China’s decision. Less than half an hour after the Chinese announced it, Malaysia also dropped its peg of 3.8 ringgit to the dollar. Yes, the Chinese government decision has already changed much of the world’s economic happenings.
Let me briefly explain. By changing its currency from being a fixed one to a managed float, there is much more greater flexibility in the yuan now. Unlike the past in which the yuan will always be obsolete, and not reflective of current economic trends, the new system will make it more responsive as well as more flexible to changes in the economy. This will certainly help the Chinese government better in controlling their domestic economy, as they will now be able to use interest rates better as a tool to either boost or cool down the economy. (If not, when they raised interest rates, there is a pressure for the yuan to appreciate, but since they won’t allow it to happen, they will sell more yuan thus pushing down the interest rate again).
Of course, the managed float system will make allow the yuan to be valued at a more competitive rate with other economies. This will certainly help in promoting free trade around the world as currently, many countries are imposing protectionist measures as they claimed that Chinese imports are flooding their markets, aided by the low yuan. Now, if the yuan reflects closely to its actual value, nations will have no reason to implement protectionism, and hence they will need to think of ways to improve in the production process in their country, thus leading to a more productive global economy.
Politically, this is also a good move, as it shows that the new Chinese government is relaxing their economy instead of keeping it strictly under wraps. It will also be a key step in showing that China has changed into a full market economy unlike the old Communistic system. Likewise, this move also shows that China is willing to make a step in helping to maintain economic stability across the globe.
And of course, the managed float will help to protect the Chinese yuan from the dangers of the past fixed exchange-rate regime. A managed float will ensure substantial protection to the currency to prevent it from being under attack from speculators, as well as ensure that the currency is not artificially maintained at a value (remember the 1997 Asian Financial Crisis?).
Oh yes, in macroeconomics there is a problem known as the Triffin trilemma. Basically, every country hopes to 1) control the movement of its currency, 2) control the interest rates in the country and 3) control the exchange rate. However, if you were to choose any 2 of them, you need to give up the 3rd. Thus, every nation must try to pick the 2 best choices that fits its needs. So with China giving up a fixed exchange rate, this will allow it to better control its domestic interest rates.
On the whole, I must say that the decision by the Chinese are indeed steps forward in helping to maintain global economic stability, as well as a big step forward towards free trade and lastly, it helps to managed the Chinese economy, thus preventing it from overheating. All this will mean that there will be greater economic stability not just in China, but also across the world.
But the truth is, there are a lot of implications due to China’s decision. Less than half an hour after the Chinese announced it, Malaysia also dropped its peg of 3.8 ringgit to the dollar. Yes, the Chinese government decision has already changed much of the world’s economic happenings.
Let me briefly explain. By changing its currency from being a fixed one to a managed float, there is much more greater flexibility in the yuan now. Unlike the past in which the yuan will always be obsolete, and not reflective of current economic trends, the new system will make it more responsive as well as more flexible to changes in the economy. This will certainly help the Chinese government better in controlling their domestic economy, as they will now be able to use interest rates better as a tool to either boost or cool down the economy. (If not, when they raised interest rates, there is a pressure for the yuan to appreciate, but since they won’t allow it to happen, they will sell more yuan thus pushing down the interest rate again).
Of course, the managed float system will make allow the yuan to be valued at a more competitive rate with other economies. This will certainly help in promoting free trade around the world as currently, many countries are imposing protectionist measures as they claimed that Chinese imports are flooding their markets, aided by the low yuan. Now, if the yuan reflects closely to its actual value, nations will have no reason to implement protectionism, and hence they will need to think of ways to improve in the production process in their country, thus leading to a more productive global economy.
Politically, this is also a good move, as it shows that the new Chinese government is relaxing their economy instead of keeping it strictly under wraps. It will also be a key step in showing that China has changed into a full market economy unlike the old Communistic system. Likewise, this move also shows that China is willing to make a step in helping to maintain economic stability across the globe.
And of course, the managed float will help to protect the Chinese yuan from the dangers of the past fixed exchange-rate regime. A managed float will ensure substantial protection to the currency to prevent it from being under attack from speculators, as well as ensure that the currency is not artificially maintained at a value (remember the 1997 Asian Financial Crisis?).
Oh yes, in macroeconomics there is a problem known as the Triffin trilemma. Basically, every country hopes to 1) control the movement of its currency, 2) control the interest rates in the country and 3) control the exchange rate. However, if you were to choose any 2 of them, you need to give up the 3rd. Thus, every nation must try to pick the 2 best choices that fits its needs. So with China giving up a fixed exchange rate, this will allow it to better control its domestic interest rates.
On the whole, I must say that the decision by the Chinese are indeed steps forward in helping to maintain global economic stability, as well as a big step forward towards free trade and lastly, it helps to managed the Chinese economy, thus preventing it from overheating. All this will mean that there will be greater economic stability not just in China, but also across the world.
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