What type of exchange rate system does China use?

China does not have a floating exchange rate that is determined by market forces, as is the case with most advanced economies. Instead it pegs its currency, the yuan (or renminbi), to the U.S. dollar.

What are the implications of China’s exchange rate policy on doing business with and against China?

1. What are the implications of China’s exchange rate policy on doing business with and “against” China? China considered its fixed currency regime as critical for the country’s growth and development. It led to rapid foreign exchange reserves accumulation due to excess imports.

Is China a fixed exchange rate system?

China’s central bank uses a modified version of a traditional fixed exchange rate that differs from the floating exchange rate the United States and many other countries use.

Is RMB a restricted currency?

Currency risk Moreover, RMB is a restricted currency and subject to foreign exchange controls. Although the PRC central government has relaxed the restrictions by allowing banks in Hong Kong to conduct some forms of RMB business, RMB is still not freely convertible in Hong Kong.

Is China’s currency devalued?

China welcomes a weaker currency, which makes the country’s goods more appealing globally. Yet avoiding sharp depreciation has meant a trade off between stability and encouraging the yuan to play a more significant role. The currency remains little used outside of China for the size of the economy.

What are the implications of China’s exchange rate policy?

The fact that Chinese imports may fall – instead of rising – with exchange-rate appreciation also has an importance consequence. Even though a renminbi appreciation will reduce Chinese exports the impact on China’s trade surplus is limited as imports to China will also fall.

Why does China keep its currency undervalued?

A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies. From the US perspective, it is seen as an attempt to offset the impact of higher tariffs on Chinese imports coming into America.