group report international finance topic exchange rate regimes

Based on building a unified foreign exchange market, the ChineseGovernment has also gradually eased the trading band of the Renminbi against the dollar,from the current 3% to 4-5%.These

VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY

INTERNATIONAL UNIVERSITY SCHOOL OF BUSINESS

GROUP REPORT

Lecturer: Ms Vu Thuy Mai Uyen

Subject: International Finance Topic: Exchange rate regimes Group 08:

Lâm Hoàn Phương Anh BAFNIU19001

TABLE OF CONTENTS

1 The period during and after the Asian financial and monetary crisis (1998-2005) 4

II Recent attempts to create an alternative to the US dollar as the world’s reserve

1 Central banks are not holding the dollars in their reserves as they have done 13

3 U.S.'s enormous and growing debt might encourage the use of inflation to devalue

4 U.S sanctions on Russia’s dollar reserves will prompt other countries to look

D What would happen if the US dollar lost its dominant position? 18

D Discuss: Does Bitcoin satisfy the Characteristics and Conditions to become a global

I China’s moves to loosen controls on the Yuan

A Renminbi (Yuan)

The Renminbi(RMB) is the official name of China's currency and is one of the mostwidely used currencies since 2013 The principal unit of the RMB is called the Chinese Yuan(CNY)

The Chinese Yuan surpassed the Euro to become the second most important currency

in trade finance, accounting for 9% (only after the US dollar, the USD accounted for 81%)

In October 2016, the Yuan became the first emerging market currency to be included

in the IMF's basket of special drawing rights, a reserve currency used by the IMF

B China’s moves to loosen controls on the Yuan

1 The period during and after the Asian financial and monetary crisis (1998-2005)

On December 11, 2001, China became an official member of the Harmonized TradeOrganization to cool down this giant country's economy in world trade (WTO) With thechallenges posed to the economy after joining the WTO, China continues to implement thefixed exchange rate mechanism

Massive capital inflows into China have put upward pressure on the Renminbi Tocontrol the Yuan's price, the central bank must buy foreign currency, increasing liquidity forthe banking system As a result, China's foreign exchange reserves increased by more than40% year-to-date to $540 billion by the end of October 2004 With this, China became thesecond-largest foreign exchange reserve country in the world world, behind only Japan($820 billion) Based on building a unified foreign exchange market, the ChineseGovernment has also gradually eased the trading band of the Renminbi against the dollar,from the current 3% to 4-5%

These measures by the Chinese government not only helped limit the appreciation ofthe Renminbi but also kept the currency low for a long time, encouraging Chinese exports.However, maintaining the current exchange rate (8.26 - 8.28 Yuan/USD) is not an easy thing

to do According to the assessment, there are times when China's central bank has to spendRMB to buy up to 600 million USD per day This intervention cannot be sustained over along period

Therefore, China has taken several measures to ease the pressure on the Renminbi,namely:

+ One is a pilot from November 1, 2003, that allows 14 provinces and regions toinvest more abroad, with the ceiling from 1 million USD to 3 million USD

+ The second is to take some coordinated measures such as: reducing the level

of export incentives; tightening regulations on lending money to real estate investorsand limiting foreign banks' investment quotas in China's bond and stock markets.+ In October 2004, during the meeting of the Group of 7 leading industrializedcountries (G7) in Washington, China confirmed that it would move towards a flexibleexchange rate of the Renminbi Although there is no specific timetable for thecommitment to exchange rate flexibility, the Chinese government has introducedseveral measures to reform monetary policy

Thanks to the above adjustment efforts by the government, the Renminbi has stoodfirm this time and for a long time to come As of 2005, China's foreign exchange rate waspegged to the US dollar at 8.28 Yuan for 1 US dollar, with a reasonably wide range of +/-0.3% per day

2 Period 2005 onwards

Policies to maintain a high exchange rate of the Renminbi against the dollar havehelped China's economy prosper, especially in the international economic arena, over the pastdecade However, in recent years, it has caused internal and external imbalances Facing greatpressure from China's major economic partners in the world such as the US, Japan, and the

EU, to force China to implement a policy of floating exchange rate and appreciation of theRenminbi China's appreciation of the Renminbi is the result of the US, European Union(EU), and some other countries for long time thinking that the Yuan is undervalued, causingdamage to the trade of these countries According to calculations by US economists, theRenminbi is 40% below its true value if the currency is allowed to float freely in the market

On July 21, 2005, China officially switched to a floating exchange rate system that isdetermined based on market supply and demand The goal is to establish and improve asocialist-oriented market economy in China, allowing the market to play its role in resourceallocation and further strengthen the regime's floating management Exchange rates are based

on market supply and demand.

On July 22, 2005, China officially announced a series of measures as follows:

+ First, the moderate adjustment of the Renminbi: an increase of 2.1%, or 8.11Yuan/USD

+ Second, a more important change: the Renminbi will no longer be pegged tothe USD, but will instead be denominated against certain strong currenciessuch as us$,€,¥, K Won, etc (This decision was approved by the StateCommittee on July 21, 2005)

+ Third, although the intraday exchange rate fluctuation is quite large (+/- 3%for USD +/- 5% for Euro, etc.), theoretically, this daily fluctuation is still takeninto account Therefore, for example, the USD can be overvalued by about 6%

a month, and the authorities will use a maximum margin of 3% applied to theUSD These measures represent a major shift in China's currency, from analmost fixed exchange rate policy to a state-regulated market-driven floatingexchange rate mechanism According to China, this is in line with the actualcontext of China's overseas regional development

The Xinhua News Agency quoted a source from the People's Bank of China as sayingthat the exchange rate adjustment marks the beginning of a more flexible exchange ratemechanism while reducing trade imbalances and stimulating demand The new exchange rate

of the Yuan will make China's monetary policy more independent

US Treasury Secretary John Snow stated that the US welcomes this and considers it amove towards a more flexible monetary system, contributing to stabilizing the globaleconomy

In 2006, China still implemented the foreign exchange policy according to Directive

No issued on September 9, 2002, of the Foreign Exchange Administration of China requiringcommercial banks to comply with regulations on companies and enterprises Enterprises areallowed to keep foreign currency in their accounts, up to 20% of foreign currency incomefrom current transactions

China's foreign exchange reserves by 2007 had increased to $1,528,249 billion On

August 13, 2007, the Foreign Exchange Administration issued Directive No 48 allowingeconomic organizations to base their demand on using foreign currency for production andbusiness the right to retain foreign currency from current transactions on the account Thus,after 13 years, China abolished the foreign exchange policy, this policy was abolished whenthe economy grew strongly for many years, the inflation rate was low, the balance ofpayments, and the balance of trade was a large surplus, and high foreign exchange reserves.The policy of tightening foreign exchange management is also reflected in the regulations onrestrictions on domestic foreign currency lending.

On August 5, 2008, the Prime Minister of China signed the Ordinance amending theRegulation on Foreign Exchange Management to allow the liberalization of currenttransactions and easing the management of capital transactions with content similar to theOrdinance Vietnam's foreign exchange

Thanks to the implementation of exchange rate policy reform with a series of strictforeign currency management measures, China has succeeded in operating the exchange ratepolicy, ensuring that the foreign currency needs of the economy are fully steady economicdevelopment

For nearly 20 years (from 1994 to the present), after adjusting the exchange rate,China still maintains a stable foreign currency market, based on the balance between thesupply and demand of foreign currency The State strictly manages foreign currency revenuesafter adjusting the exchange rate, which has contributed to the loss of foreign currencyownership of commercial banks, which is the key to success for banks to have enough foreigncurrency sold to economic organizations and individuals in need

In the period from 2006-2009, with its commitment to adjust the price, Chinacontinued to appreciate the Renminbi The RMB exchange rate initially appreciated, from8.27 CNY/USD to 6.8 CNY/USD in 2009

On June 22, 2010, China took the first step in its commitment to flexible Yuan prices.Accordingly, the Central Bank of China has set a new exchange rate at 1 USD = 6.7980 Yuan,

up 0.43% from 6.8275 Yuan on June 21, 2010 This is the highest level since Beijing revaluedthe Yuan in July 2005 The move was due to China's desire to ease the tense atmosphere atthe Group of Advanced and Developing Economies (G-20) Summit, then meeting in Canada

In 2011, the Yuan continued to appreciate, but in a narrow range, about 0.5-1%, from6.8 CNY/USD at the end of 2010 to 6.3 CNY/USD at the end of 2011.

In June 2012, the Yuan continued to appreciate and reached a record level OnFebruary 10, 2012, the Yuan reached a record high of 6,293 to 1 USD This is the first timethe Renminbi has fallen below the threshold of 6.30 Yuan to 1 USD On June 19, 2010, ThePeople's Bank of China announced that it paved the way for the Renminbi exchange rate to

be converted to one dollar more flexible way

C Reasons for China's move to loosen control on the Yuan:

In 2005, before many harsh reactions from China's trading partners in the world,especially countries such as the US, EU, Japan, etc., it was said that China was pursuing apolicy of low exchange rate of the Yuan, which aimed at the low-cost commercialcompetition It was those pressures that led China to adjust the exchange rate in the direction

of raising the Yuan's value at this time to 1USD = 8.27 CNY, then the central bank carried outexchange rate reform, allowing a floating exchange rate within the range of 0.3% compared

to the official central bank rate The Yuan has appreciated by 3.12% since the exchange ratereform With its commitment to adjust the price, China continues to appreciate the Yuan TheRMB exchange rate initially appreciated, from 8.27 CNY/USD to 6.8 CNY/USD in 2009.This has led to a slowdown in FDI inflows into China (decreased in 2005) However, thencontinued to increase from 2006-2008, at this point, it seems that the exchange rate is nolonger the cause of China's foreign investment flows, as the investment environment, as wellsuch as incentive policies, the support of the Chinese government is what internationalinvestors are interested in

Figure 1: Total FDI in China in the period 1997-2008

Unit: million USD

Source: General Statistics Office of China

The period after the world economic crisis in 2008.

During this period, the exchange rate was hardly a factor affecting China's FDI.However, international experts say that the Renminbi is still undervalued compared to its realvalue Moreover, the Chinese government has policies to keep the Yuan stable against thedollar, specifically in 2010, 1USD=6.7 CNY and now 1USD=6.14 CNY This is a point thatinvestors need in an investment environment Therefore, China is still an attractiveinvestment environment, in particular, FDI capital still tends to increase, but is not stable,especially in 2012

Figure 2: Total FDI into China from 2008 to 2014

Unit: million USD

Source: General Statistics Office of China

D Pros & Cons

A weaker Yuan makes Chinese exports more competitive, and cheaper to buy inforeign currency From the US side, this is considered an effort to compensate for the damage

of Chinese goods imported into the US subject to higher taxes While this may seem like aboon to consumers around the world because they can now buy Chinese goods at a cheaperprice, it carries other risks A weaker Yuan makes imports more expensive to China, therebyrisking higher inflation and pressure on an already slowing economy, as well as causing thosewith money to invest in other assets

Under the managed floating exchange rate mechanism, the People's Bank of Chinawill gradually reduce its role in managing foreign exchange rates, which may lead to a slowincrease in foreign currency reserves

Managing the exchange rate comes from the common interests of the economy; Thismeans that at a time it is necessary to determine which factors need to be prioritized andwhich factors can be sacrificed for maximum overall benefit For example, the decision toappreciate the local currency to ease the pressure on foreign debt repayment of enterprises(Government) and accept a temporary decline in exports if this creates fewer difficulties forthe economy

For China, exchange rate reform is a prerequisite for trade reform, especially in terms

of opening up and international integration Without exchange rate reform, trade reform willnot work

Stabilizing and improving the reputation of the national currency will have the effect

of encouraging domestic and foreign investors to invest in production and businessdevelopment As analyzed in China's experience, the stability of the macroeconomicenvironment as well as the reputation of the national currency in the international market willmake foreign investors feel secure to invest large capital in projects judgment of that country

A stable foreign exchange environment will help that country attract export capital in theworld

II. Recent attempts to create an alternative to the US dollar as the

world’s reserve currency

A Bric’s attempt to replace the dollar position

With the US Federal Reserve chairman warning about inflation, the US dollar is in thenews these days, and there’s a sense that the world economy has become excessively reliant

Russia and China are spearheading the de-dollarization effort within the BRICS to protect their interests deriving from their geopolitical rivalry with the US and in light of the risk of future sanctions against them India, Brazil, and South Africa have backed BRICS statements that the international monetary system needs to be altered and that more

opportunities should be provided to promote the use of national currencies in trade

1 Dangerous dollar dependence

The global economy's dependence on the dollar has the appearance of dysfunctional codependency because both the US and the rest of the world depend on the strength of the currency:

- Brazil's reliance on the dollar is evident given that the majority of its export invoices are in dollars, even though the United States only receives 17 percent of all

of Brazil's exports This imbalance may lead Brazilian policymakers to advocate the development of a BRICS reserve currency

- The idea of an alternative financial system free from Western dominance has been further bolstered by the near-elimination of Russia from the West-led, dollar-dominated financial system following the Russia-Ukraine war in early 2022

- Even though only 5% of India's imports come from the US, 86 percent of them