Pegging in CHina

Before we understand the role that pegging of RMB plays in the upliftment of the Chinese economy we need to understand the pegging. Pegging is an idea of fixing the exchange rate of currency with the value of another’s country currency or to a basket of value, generally a small economy peg its currency with the currency of big economy so as to stabilize the value of the currency.

The main issue to deal with are 1) The impact of pegging on china and other economies 2) Why China never wanted to De peg its currency? 3) The basis on which De-pegging should be done? 4) Other competitive advantage to the China? 5) Problems faced by USA and other big economies 6) How RMB is going to react after De-pegging?

As we have understood the meaning of the word Pegging now we should focus on the first main issue, China pegged its currency with USA for nearly 15 years, the year of growth for the china because as it pegged its currency with USA, the value of RMB remains the same but the value of US dollar increase there by making the US dollar expensive in the market as compare to the RMB (the Chinese currency)

Because the Chinese banks has already pegged their currency that means they never allowed their currency to move according to the market, rather fixed the value, especially when the US dollar shift according to the market forces, its product becomes expensive in the market but the product of Chinese economy remains cheaper as compare to US and European currency there by giving an advantage to the Chinese economy, the advantage which they took for 15 years during which they becomes the contender for world’s no. 1 economy. We can analyze the impact from the GDP growth rate of china during this period which is around 9% and the exports to the US was around 202 billion in 2005.

But it was in 2005 that Chinese bank decided to de peg its currency even though pressure was mounted from 2002. The exports from China to USA is more as compare to

exports from USA to china which created an imbalance in the trade because of cheaper currency everyone wanted to trade with China, as its goods were cheaper due to cheaper currency as compare to the rest of the world. If we talk from the point of view of the Chinese currency, they never wanted to de-peg their currency, because pegging gave than the competitive advantage but the moment US government realised that pegging is not favourable for them and ask for changing the system to which Chinese government de-peg the currency but at a Bibliography Moran, A. , 2010. China ready to end pegging currency to U. S. Dollar. [Online] Available at: http://digitaljournal. com/article/288688 [Accessed 29 5 2013]. lower rate.

But the question arises that by how much percentage the RMB should be appreciated, because it was pegged for almost 15 years, USA was saying to de-peg with such percentage that will improve the balance of payment but the question arises even if RMB is appreciated by that percentage, even then there was no surety that the RMB was appreciated by the right percentage and its value is according to the market value. If we study the economy of the China, we can clearly see that its population is largest in the world, so they have labour advantage, during these years (1990- 2005).

Apart from pegging another advantage that China had was cheap labour, they never allowed the labour rate to go beyond a certain level as compare to the labour in other countries, so apart from currency advantage they also had advantage of making the products at a cheaper rate, so cost of production was much lower, that’s why foreign exchange flows to China during this period.

Foreign exchange brought advance technology and majorly all big manufacturing and technological companies started operating from China, they shifted their manufacturing units to China that also give a threat to other big economies. The problem faced by big economies was losing of trade because the goods of China was cheaper so everyone wants to trade with China, another problem was imbalance in the trade, foreign exchange was flowing towards China, the import bill of USA was increasing, third problem was shifting of the industry towards China due to which there was unemployment in the other economies. That’s why USA wanted that RMB should be appreciated.

The main question was to decide the basis on which appreciation should be done in the Chinese currency, later on in one of the studies it was decided to include inflation factor also and then to find out the appreciation to be done, but even after making the appreciation the exports for China increases by three fold from 2005-2008, the main reason behind this was the goods from China was still cheap as compare to other countries due to cheap labour and second it was too late of USA to react because USA allowed China to grow for 15 years, all the industries were set up there, huge amount of inflow of foreign currency, investments were already made and now it was too difficult to get out of the China or to ignore China.

Then there was mishap of recession in 2008 and fall of Lehmann brothers that gave USA huge disadvantage, during the growth years China did not dependent on USA for its exports so even when there was recession in the USA China was remain more or less unaffected due to its exports to the world at large.

So we can conclude that China took a huge advantage by pegging its currency which allowed China to grow many fold but the moment other big economies analysed this, it was too late that even when the currency of China was de-peg still the exports of China increased by many fold and now it is too difficult to ignore china even though China is also facing some problem in terms of reducing population which will not provide too many labours for work but all this will take time till than China will grow by leaps and bounds. Bi Bibliography Bayraktar, N.

, n. d. Currency misalignment: the China case. [Online] Available at: http://www. aabri. com/manuscripts/121224. pdf [Accessed 30 05 2013]. Moran, A. , 2010. China ready to end pegging currency to U. S. Dollar. [Online] Available at: http://digitaljournal. com/article/288688 [Accessed 29 5 2013]. bliography Moran, A. , 2010. China ready to end pegging currency to U. S. Dollar. [Online] Available at: http://digitaljournal. com/article/288688 [Accessed 29 5 2013]. Bibliography Bayraktar, N. , n. d. Currency misalignment: the China case. [Online] Available at: http://www. aabri. com/manuscripts/121224. pdf [Accessed 30 05 2013]. Moran, A. , 2010.

China ready to end pegging currency to U. S. Dollar. [Online] Available at: http://digitaljournal. com/article/288688 [Accessed 29 5 2013]. Bibliography Bayraktar, N. , n. d. Currency misalignment: the China case. [Online] Available at: http://www. aabri. com/manuscripts/121224. pdf [Accessed 30 05 2013]. Moran, A. , 2010. China ready to end pegging currency to U. S. Dollar. [Online] Available at: http://digitaljournal. com/article/288688 [Accessed 29 5 2013]. Navarro, P. , 2012. China’s Currency Manipulation: A Policy Debate. [Online] Available at: http://www. worldaffairsjournal. org/article/china%E2%80%99s-currency-manipulation-policy-debate [Accessed 1 6 2012].