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Examining the Chinese Exchange Rate Reform and the Possibility of the Chinese Yuan Becoming a Regional Trade Currency: Claims Analysis“Adopting a more flexible exchange-rate regime serves China’s long-term interest as the benefits… far exceed the cost in reorganising industries and removing outdated capacity” Hu Xiaolian’s (deputy governor of the People’s Bank of China and the former director of the State Administration of Foreign Exchange in China) argues.
Analysts (e.g. Geithner 2011) indicate that if the Chinese government is undertaking a relaxation of restrictions on the use of RMB, then the exchange reform will gradually help the Chinese monetary authority manage the level of exchange rate that will contribute to a more market-determined exchange rate over time.
In 2010, the Chinese economy grew by 10.3% compared to 9.2% in 2009 indicating recovery from the global financial crisis.
The Chinese government developed strategic objective and programs aimed at rebalancing the economy to rely more on domestic demand for growth. The Chinese government realizes that the exchange rate reform is one way to resolve the imbalance.
Hu Xiaolian’s argues that a freer exchange rate liberates China’s monetary policy, spurs innovation in China exports industries and channels investment to its service sectors. Chinese monetary authority increasingly turned toward containing inflation. Economic recoveries in other parts of the world have begun to decrease the gap between China’s growth and that of its trading partners. As a result, the contribution of real net exports to growth increased.
In order to contain the rising prices in both goods and property markets, China shifted to less simulative monetary and fiscal policies. China managed to decrease its fiscal deficit from 2.3 % of GDP in 2009 to 1.6 % in 2010. The PBC increased the amount of reserves (required by large commercial banks to hold at the central bank) from 15.5% of total deposits at the beginning of 2010 to 19% as of mid-January 2011. The PBC also raised China’s benchmark 1-year lending rate 50 basis points from 5.31% to 5.81% (though it is less than the rise in the inflation rate). China’s international trade has also recovered to rise up to 31.4% in 2010 which is 10.2% above their 2008 level. Imports also rose 39.1% in 2010 which are 23.6% above their 2008 level. In 2010 the goods and service trade surplus was 4.0% of GDP compared to 7.7% in 2008. (Geithner 2011)