This is due to a trade surplus with the USA. China does not want individual businesses domestically to hold onto the USD they receive from payments of exports to the USA. As the companies and holders will soon enough want to buy local currency for their business needs. This would cause a demand increase for the local currency, which would make the Chinese yen appreciate, increasing its value and price. This causes appreciation against the USD which is bad for the export business.
That is, China has to face the transitional risks. Since the market of China is opened to the world as RMB internalization, the economy of China is highly correlated to the economy of the world. Thus, anything happened in the global financial market will have influence on the economy of China, especially the exchange rate market. If there is a difference between the nominal exchange rate and the real exchange rate, then there will be an arbitrage opportunity. This will stimulate the short-term speculative capital from the global investors to the exchange rate market and therefore have an adverse effect to the stability of Chinese economy.
The foreign currency that the country using can be use to attract many investors as they will be fascinated to lesser problems with the better exchange rate and also more stable economy. Besides reducing risk and protecting against inflation and devaluation, there are some compelling reasons for a country to decide to give up so much control over its economy.As we mentioned above, full dollarization creates positive investor sentiment, almost extinguishing speculative attacks on the local currency and the exchange rate. The result is a more stable capital market, the end of sudden capital outflows, and a balance of payments that is less prone to crises. The country have to use an alternative way to stabilize the floating currency and that way is call the full dollarization. The country use this alternative way is to reduce the risk that the country will face and also provide stable and secure economic system.
Introduction The rising International commodity prices continue to put pressure on global inflation, and with growing China’s economy, the huge demands from China is considered to be an important reason to push up the international commodity prices. According to researches using FA-VAR method to build a complete macro-economic model with multi-variables, suggesting that: Firstly, the increase of Chinese demand is a significant factor of the rising international commodity prices; Secondly, The rising of China's interest rate, RMB/USD FX rate would restrain the international commodity prices; Third, the RMB exchange rate and interest rates will have a significant impact on international commodity prices, but the effect of the interest rate
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.
From2008, currency swap agreements have been used all around the world. Reported by Bloomberg, on October 2013, the Russian and Chinese central banks signed an agreement on yuan-rubles swaps to double trade with its biggest partner. In fact, PBoC has signed the currency swap agreements with 28 countries’ central banks, such as Canada, Korea and Argentina. By doing so, it provides powerful support for the development of overseas RMB market and sets up a yuan-denominated one-to-many trading, financing and clearing system. In the context of globalization, the currency swap agreement has transformed its role as dealing with the crisis to expanding the bilateral trade and investment.
The average daily turnover in currency derivatives in India which includes (forward and option market) was 25,500 crore in April 2012 and slowly rises up to 41,000 crore in February 2013. Further increase in volume is expected since the foreign institutional investors are allowed to participate in the exchange-traded derivatives segment. The Indian Forex is expected to grow further with positive developments and one can become a positive stakeholder in the world currencies market. Exchange Rate Mechanism (ERM): Exchange Rate Mechanism is designed to control the foreign exchange rate with respect of other currencies. Also to normalize the currency exchange rates within a range and to avoid any problem in the market.
Currency fluctuations normally happen in countries where they practice the free exchange rate system. Currency fluctuation is a situation in an economy where the value of the value of the currency rises, fall or both frequently against its major trading currencies for a period. While some currencies fluctuate freely against each other, such as the Ghana Cedi, Japanese Yen and the US Dollar, others are tied. They may be pegged to the value of another currency, such as the US dollar or the Euro, or to a basket of currencies (Farlex, 2009). Changes in interest rate affect currency value and exchange rate.
By the end of 1990, India was facing its biggest economic crisis. The value of the Indian Rupee was going down. In order to slow down the decline, the Reserve Bank of India started expending international reserves. By mid-1991 there took place a sharp devaluation of the Indian Rupee against other major currencies. The foreign exchange reserves were depleted and the nation came to such a point that it could barely finance three weeks’ worth of essential imports.
China has faced inflation and deflation. Particularly, inflation had bring out many effect on China citizen, such as income gap between the poor and the rich, rises in cost of living, and income gap between the rural and city residents. First, the common effect of inflation is the cost of living increases. As a retirees, households, and the people who depend on social security benefits, there are always make the best decision, since they only have fixed incomes. When inflation occurred, the purchase power of RMB will fall and these group are stand to lose on their great deal, which mean that these kind of people will not be able to purchase the same as before.