Currency analysis of US dollar and RMB
Introduction
History of CNY/USD Exchange Rate
Period to 1994: Prior to 1994, China maintained a dual exchange rate system. This consisted of an official fixed exchange rate system, which was used by the government, and a relatively market-based exchange rate system that was used by importers and exporters in “swap markets”. The two exchange rates differed significantly. For example, the official exchange rate with the dollar in 1993 was 5.77 Yuan versus 8.70 Yuan in the swap markets. The foreign exchange was highly restricted in order to limit imports, resulting in a large black market for foreign exchange.
From 1994 to 2005: In 1994, the Chinese government unified the two exchange rate systems at an initial rate of 8.70 Yuan to the dollar, which eventually was allowed to rise to 8.28 by 1997 and was then kept relatively constant until July 2005. From 1994 until
July 2005, China maintained a policy of pegging the RMB to the U.S. dollar at an exchange rate of roughly 8.28 Yuan to the dollar and Chinese central bank maintained this peg by buying (or selling) as many dollar-denominated assets in exchange for newly printed Yuan as needed to eliminate excess demand (supply) for the Yuan. The peg appears to have been largely intended to promote a relatively stable environment for foreign trade and investment in China.
From 2005 to 2008: From 2005, Chinese government started to reform the peg. The
Chinese government modified its currency policy on July 21, 2005 and the exchange rate of the U.S. dollar against the RMB would be adjusted from 8.28 Yuan to 8.11, an appreciation of 2.1%. The government announced that the RMB’s exchange rate would become “adjustable, based on market supply and demand with reference to exchange rate movements of currencies in a basket”. The situation in the next three years would be described into “ management float” which is the market forces determined the general
1
1
direction of the RMB’s movement. As we know
History of CNY/USD Exchange Rate
Period to 1994: Prior to 1994, China maintained a dual exchange rate system. This consisted of an official fixed exchange rate system, which was used by the government, and a relatively market-based exchange rate system that was used by importers and exporters in “swap markets”. The two exchange rates differed significantly. For example, the official exchange rate with the dollar in 1993 was 5.77 Yuan versus 8.70 Yuan in the swap markets. The foreign exchange was highly restricted in order to limit imports, resulting in a large black market for foreign exchange.
From 1994 to 2005: In 1994, the Chinese government unified the two exchange rate systems at an initial rate of 8.70 Yuan to the dollar, which eventually was allowed to rise to 8.28 by 1997 and was then kept relatively constant until July 2005. From 1994 until
July 2005, China maintained a policy of pegging the RMB to the U.S. dollar at an exchange rate of roughly 8.28 Yuan to the dollar and Chinese central bank maintained this peg by buying (or selling) as many dollar-denominated assets in exchange for newly printed Yuan as needed to eliminate excess demand (supply) for the Yuan. The peg appears to have been largely intended to promote a relatively stable environment for foreign trade and investment in China.
From 2005 to 2008: From 2005, Chinese government started to reform the peg. The
Chinese government modified its currency policy on July 21, 2005 and the exchange rate of the U.S. dollar against the RMB would be adjusted from 8.28 Yuan to 8.11, an appreciation of 2.1%. The government announced that the RMB’s exchange rate would become “adjustable, based on market supply and demand with reference to exchange rate movements of currencies in a basket”. The situation in the next three years would be described into “ management float” which is the market forces determined the general
1
1
direction of the RMB’s movement. As we know