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2.ConceptofExchangeRate…………………….………………….……………….3

3.ExchangeRateofChina…………………………………………………………..3

3.1.ProfileofCNYexchangeratesince2008………………………………….3

3.2.ExplanationofCNYappreciationsincemiddle2010……………………..5

4.ImpactsonFutureEconomicsPerformanceofChina………………………….…6

5.Conclusion…………………………………………………………..……………8

References…………………………………………………………………………...9

1.Introduction

Theexchangerateplaysanimportantroleintheinternationaltradingactivities.WiththecontinualincreaseoffavorablebalanceoftradeofChina,thepressureofappreciationoftheCNY（theChinesecurrency）becomeshigherandhigher.MakingastudyoftherelationbetweenexchangerateandbalanceofpaymentofChinaisofconsiderablerealisticsignificance.

Inthisreport,theauthorfirstintroducedtheconceptofexchangerate,presentedtheexchangerateprofileofChinaintherecent5years,investigatedtheCNYappreciationcaseanditsinfluenceonthebalanceofthecountry’spayment,andfinallydrewaconclusionabouttheproblem.

2.ConceptofExchangeRate

Exchangerateisaratioofonecountry’scurrencyagainstthecurrencyofanothercountry.Toputitsimply,itisaproportionthatshowshowmuchonecountry’scurrencypricecanbeformulatedbythecurrencypriceofanothercountry.（Cathy,2012）

Intheshortterm,theamountofexchangerateofonecountryisdeterminedbythecountry’soveralldemandandsupplytowardsforeigncurrency.Whatismore,iftoomanyforeignersshop,invest,orspeculateinthecountry,usingthemoneyofthecountrytheystayin,thenthecountry’sexchangeratewillbeaffected.

3.ExchangeRateofChina

3.1.ProfileofCNYexchangeratesince2008

TheUSD-CNYexchangeratedemonstrateshowmuchonecurrency,theUSD,iscurrentlyworthintermsoftheother,theCNY.Historically,from1981until2012,theUSD-CNYaveraged7.0100reachingapeakof8.7300inJanuaryof1994andarecordlowof1.5300inJanuaryof1981（Zhu,2009）.Astheexchangeratewillbeinfluencedbymanycomplicatedfactors,inordertomakeamorespecificstudyofit,theUSD-CNYexchangeratein2008–2012willbetakenspecialattention.Figure1showstheUSD-CNYexchangerateoverthelast5years.

Figure1:

Chineseyuanexchangeratein2008-2012（TradingeconomicsWebsite,2012）

TheUSD-CNYexchangerateindicatesChina’scompetitivenessleveltosomeextent.AccordingtoFigure1,atthebeginningof2008,theUSD-CNYexchangeratewasveryhigh,reachingapercentageof7.2800.Thatistosay,China’seconomicsituationwasrathergoodatthattime.

However,fromJanuaryof2008,theUSD-CNYexchangeratebegantofallcontinually.Tillthemiddleofthatyear,theexchangeratefinallybecamesteady.DuetotheimplementationoftheproactivefiscalpolicyandprudentmonetarypolicybyChinesegovernment,fromthattime,theexchangeratekept6.8200moreorlessforalongtime,sincemiddle2008tomiddle2010（Ahmed,Omneya,2007）.

However,theUSD-CNYexchangeratebegantofallagainfromthemiddleof2010.Obviously,thisfallingwassharpandcontinuous.UntilJanuaryof2012,theUSD-CNYexchangeratewasbelow6.400,stillmaintainingatrendoffalling.Chinesegovernmenttriedtostrengthenandimprovemacro-control;

unfortunately,itseemedtobeoflittleuse.Inthenextpart,Iwillinvestigatetheeconomicnatureofthisphenomenon.

3.2.ExplanationofCNYappreciationsincemiddle2010

Generallytherearetwotypesofexchangeratesystemsovertheworld,thefloatingexchangerateandthefixedexchangerate.

Afixedexchangeratemeansvalueofthecountry’scurrencyisfixedcomparedtoasingleforeigncurrencyorsomekindsofmeasureslikegold（AhmedandOmneya,2007）.Theadvantagesofafixedexchangerateincludestabilizingthecountry’scurrencyvalue,makingthetradebetweenthecountryandspecificforeigncountrymoreconvenient,andcontrollinginflation（Patricia,2004）.Forexample,alotofsmalleconomicentitiesovertheworldemploysfixedexchangerateastheycanbenefitmorefrominternationaltradingandsufferlessfromfinancialriskandinflationthatcaneasilyhappenduetotheirsmalleconomicvolumes.However,thefixedexchangeratepreventedthegovernmentfrominfluencingthenationaleconomybyusingdomesticmonetarypolicy.Forexample,inthefixed-exchange-ratecase,thecentralbankcannotdecreasethecurrencyvaluebysupplyingmoremoney（Patricia,2004）.

Afloatingexchangeratereferstocasethatthecurrencyisallowedtochangewiththeforeignexchangemarketwithinacertainregioncalledexchangerateregime（AndrewandGlauco,2011）.Inotherwords,thevalueofthecurrencycanfluctuatewithitssupplyanddemandintheinternationaltrading.

ThecaseofCNYisalittlebitcomplicated.TheChinesegovernmentdroppeditslong-historyfixedexchangeratetoUSDinJul2005butstillkeepsamodifiedfixedrate.Theysetarateandthenallowtheratetofluctuatewithinapre-definedroom.Suchroomisoftensmall.Asaresult,theexchangeratewillcomebacktothesetlevelafteranysmallfluctuationcausedbythemarket.That’sthereasonwhytheCNYexchangeratemaintainedat6.8duringmiddle2008tomiddle2010withsmallfluctuationinFigure1.SinceCNYfollowsthemodifiedfixedrate,orthesemi-fixedrate,itsvalueisinfluencedbyboththegovernmentpoliciesandtheforceofmarket.

（1）Governmentpolicies

InJune2010,thePeople’sBankofChinastatedthatChinawould"

proceedfurtherwithreformoftheRMBexchangerateregimeandincreasetheRMBexchangerateflexibility"

（Cathy,2012）.Asbecomingthesecondworldeconomicentity,Chinadoesn’tneedtorelyonfixedexchangeratetokeepitseconomicstabilizationasmuchasbefore.Andontheotherhand,theincreasingtradingvolumewithothercountriesexceptUSalsorequiresamoreflexibleexchangerate.ThatisthereasonwhyChinesegovernmentrelievestheircontrolontheexchangerateandwhytheCNYexchangeratedroppeddramaticallyinmiddle2010.

（2）Marketforce

OneofthemostimportantfactorsinfluencingtheUSD-CNYexchangerateisthedepreciationofUSD.Figure2showsthepriceofgoldinUSD.Wecanseethatgenerallythepricekeptincreasingsince2008.RoughlyitrevealsthetrendofdepreciationofUSD（thoughnotveryaccuratelybecausethegoldpriceitselffluctuates）.ThereforetheUSD-CNYexchangeratekeptdecreasing.

Figure2.GoldpriceinUSDsince2008（TradingeconomicsWebsite,2012）.

4.ImpactsonfutureeconomicperformanceofChina

ThelowerUSD-CNYexchangerateisadouble-edgedswordforChina’sfutureeconomicperformance.Ingeneral,itwilldobothpositiveandnegativeimpactstothenationaleconomy.

Positive:

（1）Improvingtermsoftrade

Chinahasgoneintoastageofheavyindustrialization.EnergyandrawmaterialhasbecomemoreandmoreimportantforChina.Inthepast,badtradingtermsmakeChina’sdomesticrawmateriallosequicklyandheavily.CNYappreciationwillhandlethisproblemradically.

（2）Curbingdomesticinflation

AlthoughCNYappreciates,however,thedomesticpricehasnotchangedatall.AsthepriceofimportedproductsfallsbecauseofCNYappreciation,thewholedomesticpricefalls,whichcausemoderatedeflation,andhelpstocurbdomesticinflation（Zambujal,Miguel,2011）.

（3）Puttingoffexcessforeign-currencyreserve

ForadevelopingcountrylikeChina,havingtoomuchforeign-currencyreserveisahugewaste.AsCNYappreciationmeansgreaterpurchasingpower,itwillbeagoodwaytoworkoffexcessforeignreserve.

Negative:

（4）Reducingthecompetitivenessofproducts

CNYappreciationwillmakeChina’sproducts’exportpricehigher,thentheproductswilllosetheirpriceadvantage.ThereductionofthecompetitivenessofproductswildirectlyaffectChinesemanufacturingindustry.Then,asaresult,agrowingnumberofworkerslosetheirjobs.TheunemploymentrateofChinaincreases.（Andrew,Glauco,2011）

（5）Shockingdomesticfinancialmarket

Thereisavarietyofrisksduetotheimperfectfinancialmarketandthedelayofconstructionoflegalsystem.Thatistosay,thefragilefinancialsystemmaynotbeabletoundergotheshockwaveofCNYappreciation.

5.Conclusion

Todrawaconclusion,theexchangerateisanindicatorofacountry’seconomicsituationsinglobalmarket.Itcanbefixedorfloating.Floatingexchangeratecanbeinfluencedbyalotoffactors.Generally,thechangeofonecountry’sexchangeratecanhavebothpositiveandnegativeimpactsonitsinternationaltrade.

TheappreciationoftheCNYinmiddle2010mainlyresultsfromthegovernmentpoliciesandthemarketforces.Suchappreciationcanhelpimprovethetermoftrade,curbingdomesticinflationandputtingoffexcessforeign-currencyreserve.Ontheotherhand,appreciationofCNYcanleadtothereductionincompetitivenessofthecountry’sproductsandtheturbulenceofthedomesticfinancialmarketaswell.

References

TradingeconomicsWebsite,2012,USDCNY-ChineseYuanExchangeRate,accessedonJun16,2012,

TradingeconomicsWebsite,2012,ChinaBalanceofPayment,accessedonJun16,2012,

AhmedE.,OmneyaA.S.,（2007）Exchangerateexposure:

dosizeandforeignoperationsmatter?

ManagerialFinance,Vol.33Iss:

9,pp.741–765

ZambujalO.J.,MiguelF.C.,（2011）Mappingacountry'

scompetitiveposition:

arealexchangerateapproach,StudiesinEconomicsandFinance,Vol.28Iss:

3,pp.233–244

AndrewJ.A.,GlaucoD.V.,（2011）Evidenceontheimpactofexchangerate