Essay: Currency flexibility in China

Sample Essay

The reform brought about in July 2005 has not led to value of the renminbi being determined by the forces of demand and supply. This is in opposition to what was declared by the central bank. That would have resulted in currency appreciation and could potentially have led to more flexibility in the currency which could possibly be a result of widening the band established around the parity. This would be beneficial as it could result in a reduction in the global trade imbalances and may allow the central authorities a greater level of flexibility in the use of interest rate policy as a tool of macroeconomic management.

In 2007, the Chinese government further decided to allow the Chinese currency to flow freely within a 0.5 percent band against the basket of major foreign currencies. By November 2007, US$1 was exchanged for RMB 7.46. This translated into a ten percent rise in value of the Chinese currency following the reform in 2005 (Lo, Tian, 2009:379).

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