The Effect Of RMB Revalue To The Economy Of China Dissertation

The Effect Of RMB Revalue To The Economy Of China - Dissertation Example The expectation on appreciation of RMB was postponed during the global financial crisis. The appreciation of RMB will affect the aggregate demand through two canals. The appreciation will cause pressure on the supply of money. This will lead monetary expansion in cases where sterilized intervention is not sufficient. The aggregate demand and prices of the assets will get stimulated. The imbalances between demand and supply will increase because of the expectations associated with trade surplus and speculative inflows of capital. The monetary authorities will buy the excess supply of foreign exchange in the market in order to maintain stability in exchange rates. The growth in assets of foreign currency was much more than the growth of base money. The growth of foreign assets even crossed the rate of growth of broad money. This puts pressure on the monetary authorities to fasten down the monetary growth. The growth of money will be out of control if measures of sterilized intervention cannot keep up to the task. The growth of assets of foreign currency has dropped below the growth rate of broad money after the financial crisis. In the long run, the growth rate of broad money will settle in the usual level and short term capital will start to enter into the economy of China and this will again put the supply of money under pressure. But even if the monetary authorities are able to control the stable growth rate of money supply, then also the expectation for appreciation of RMB will stimulate the aggregate demand and prices of the assets will rise. Once the appreciation of RMB is expected, the expected returns on the assets that are risky will increase and price of these assets will take the steep rising path. The value of the collateral will...The politicians of U.S. are of the opinion that revaluation of the RMB will act as the solution in problems of trade deficit. But the reality is that the current trade deficit that U.S. has with China is mainly because of t he prevailing economic conditions in U.S. So the trade deficit that is affected by RMB is negligible (Hong Kong Industrialist, 2005/6, p. 15). Introduction The director of Peterson Institute for International Economics blamed the undervaluation of the currency of China for job losses in the country of United States. The director also drew a plan of action if China did not withdraw the control of currency and permit the renminbi (RMB) to gain strength. The central bank of China known as the People’s Bank of China allowed for some relaxation. The bank announced that will abandon the two year old peg. The peg has kept the RMB with the dollar (Yu, 2010, p. 2). It allowed RMB to respond according to the forces of the market. China will now begin to move into the regime of floating exchange rate. The regime will be a tight one which was in practice in the period between 2005 and 2008. The value of RMB will be the base on a basket of currencies within a narrow range (Wharton Univers ity of Pennsylvania, 2010). Method of Analysis In the method of analysis the previous researches will be taken into account and stress will be given on assessing the impact of the revaluation on the economy. The different effects namely the balance sheet effect and the economic effect will be taken into consideration.