Advantages And Consequences Of Renminbi
1. Introduction
This report is written in order to argue about the possibility of the economic implications and foreign exchange risk of the system of exchange rate for multinational companies with subsidiaries which are located in countries with systems such as managed floating exchange rate, fixed exchange rate linked to a basket of currencies and also a fixed exchange rate backed by a currency board system. Unlike the freely floating exchange rate system which has never been applied under its purest form, monetary authorities is required by the managed floating rate in order to interfere in foreign exchange markets to prevent the currencies from moving too far from an apparent fundamental value.
2. i. Managed Floating Rate
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The current system is defined as a flexible rate regime in which the currency is being accustomed based on a set of indicators. The Chinese central bank has been applying a basket currency system as a reference unit in order to judge the needs for rate modification and also as an anchor device to manage the movement of exchange rate by setting the central parity. (Girardin and Steinherr, 2008)
According to Hu Xiaolian, the deputy governor at the Chinese central bank, rather than having the U.S. dollar alone, it is better for China to also peg their Renminbi to a basket of ten foreign currencies. The exports and imports, also balance of payments may be adjusted by the exchange rate regime with reference to a basket currency more effectively. It has been seen that the Renminbi exchange rate is stable at balanced level, although it might change in both ways against any single currency. (Fernando, V,
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