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Implications of Chinese Yuan on China’s competitiveness

Uddin, Md Akther and Baddou, Mehdi and Gulzar Mohd, Rosana (2015): Implications of Chinese Yuan on China’s competitiveness.

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The stability and level of strength or weakness in exchange rates are prime considerations of monetary authorities and businesses, both domestic and international. This paper thus analyses the RMB’s appreciation and depreciation against its major trading partners’ currencies namely the USD, EUR, JPY, AUD and MYR. It also includes a review of their volatilities and most importantly, the economic implications of the RMB rates on exports and foreign investment flows. The Renminbi has come a long way since its pegged days of 1994 to 2005. Most recently, head of the International Monetary Fund (IMF), Christine Lagarde herself, has endorsed its inclusion into an elite basket of the fund’s reserve currencies. The Renminbi is now on a managed floating system and allegations of manipulation remain, especially with notable pauses in the currency’s rises during the global financial crisis and in the second quarter of 2015. But the upward trend is undeniable, given that the Chinese economy is now the world’s number two in size and the Renminbi is now the world’s second most-used currency for trade finance. Its volatility has similarly picked up with the end of the peg and its increasing use worldwide. Ironically, an appreciating currency, albeit a managed one, bodes well for China’s economy now as it is engineering a shift away from being led by exports to being driven by domestic consumption. A strong Renminbi will encourage more import consumption, something that the government would like to see. But challenges remain. China’s still largely closed markets and questions about the country’s political, legal and economic institutions may constrain the international use of its currency. And while the Renminbi has shot up in use, international sales in the currency still account for less than 3% of global transactions. The greenback continues to dominate as the currency for trade settlements. Thus while the wind is definitely beneath the Renminbi’s sails, officials will likely need to skilfully navigate through potential turbulences ahead.

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