Rmb Exchange Rate, The: Past, Current, And Future

by Yin-wong Cheung, Fengming Qin, Kenneth K Chow

Overview

Over the past two decades, China's robust economic performance has propelled it to the world stage. At the same time, the world has increasingly scrutinized China's economic policies and activities. One of the hotly contested issues is China's foreign exchange rate policy. China's current reform and modernization policies to convert its centrally planned economy towards a market-driven one could hardly draw on experiences of other countries.This book provides a succinct and up-to-date account of China's exchange rate policy including the currency undervaluation debate and the internationalization of its currency. It begins with a brief history of the modern China's foreign exchange rate policy. In particular, it highlights the three Chinese policy characteristics; namely, independence, controllability and practicability, and graduality. This prologue helps to interpret China's policy on its currency, the renminbi (RMB); including its recent initiatives to promote the international use of its currency.The book covers the basic theoretical and empirical issues that are relevant for determining the equilibrium value of the RMB exchange rate and, hence, its degree of misalignment. Then it evaluates the controversy surrounding the RMB valuation debate, and highlights the sensitivity of empirical estimates of the degree of misalignment to alternative presumptions.The book also examines the timely issues related to China's recent efforts in promoting the use of its currency in the global financial market. After describing the background of China's recent efforts to internationalize the RMB, the book a) discusses the main promotional policies, including the recent Qianhai project and Shanghai Free Trade Zone initiative, b) evaluates the current status of the offshore RMB market, the level of international use of the RMB and the admission to the SDR basket, and c) assesses the future prospects of the RMB to be a global currency.

Product Details

ISBN-13:	9789814675499
Publisher:	World Scientific Publishing Company, Incorporated
Publication date:	12/15/2016
Pages:	276
Product dimensions:	6.20(w) x 9.00(h) x 0.80(d)

Table of Contents

Preface ix

About the Authors xi

Chapter 1 Introduction 1

Chapter 2 The Chinese Economy 9

2.1 The Post-1978 Era 10

2.2 Blistering Growth 13

2.3 Trade Giant 19

2.4 Foreign Direct Investment 32

2.4.1 Inward flows 32

2.4.2 Outward flows 39

2.5 Participation in the Global Economy 42

2.6 Conclusion 46

Chapter 3 Exchange Rate Policy 49

3.1 The Pre-reform Era 52

3.1.1 1948-1952 52

3.1.2 1953-1972 54

3.1.3 1973-1978 56

3.2 The Post-Open-Door Policy Era 57

3.2.1 1979-1993 57

3.2.2 1994-2005 62

3.2.3 2005-2015 65

3.3 Some Reflections 69

Chapter 4 RMB Valuation 73

4.1 Modeling Equilibrium Exchange Rate 75

4.1.1 Theoretical considerations 76

4.1.2 Empirical considerations 78

4.2 Estimating the Degree of RMB Misalignment 79

4.2.1 Deviations from average and trend estimates 81

4.2.2 Fundamental equilibrium exchange rate 90

4.2.3 Penn effect estimates 95

4.2.3.1 Sampling uncertainty 98

4.2.3.2 Data uncertainty 99

4.2.3.3 Economic or non-economic reasons 103

4.3 A Few Recent Studies 106

4.3.1 Schnatz (2011) 106

4.3.2 Bergsten and Gagnon (2012) 107

4.3.3 Dekle and Ungor (2013) 108

4.3.4 Fischer and Hossfeld (2014) 109

4.4 Discussions 110

Chapter 5 RMB Internationalization: I 113

5.1 Joining the Global Financial Community 114

5.2 International Currency: Functionalities and Determinants 117

5.2.1 Functionalities 118

a Medium of exchange 119

b Store of value 119

c Unit of account 120

5.2.2 Determinants 120

a Size matters 120

b Financial sector 121

c Confidence 122

d Network externalities 123

e Capital account convertibility 123

5.3 Promoting the International Use of the RMB 124

5.3.1 Bilateral RMB currency swap agreements 124

5.3.2 RMB trade settlement 130

5.3.3 Direct foreign exchange trading 132

5.3.4 Offshore RMB markets 134

5.3.5 The offshore RMB center in Hong Kong 136

a CNH, the offshore RMB 138

b Offshore RMB deposits 141

c RMB trade settlement in Hong Kong 143

d Dim sum bonds 145

e RMB-denominated equity 149

f Other RMB-denominated products 151

5.3.6 A global offshore RMB network 153

a Local offshore RMB clearing 153

b Not invited 156

c Where does Hong Kong stand? 158

5.3.7 Other measures 160

a RMB qualified foreign institutional investor initiative 161

b Shanghai-Hong Kong stock connect 162

Chapter 6 RMB Internationalization: II 167

6.1 Developments in the Onshore Market 168

6.1.1 The Qianhai project 168

6.1.2 The Shanghai free trade zone 170

6.1.3 Other free trade zones 174

6.1.4 The domestic bond market 175

6.1.5 Implications for offshore markets 182

6.2 Why Internationalize the RMB? 185

6.3 The Level of International Use of the RMB 188

6.3.1 Global foreign exchange market 189

6.3.2 Invoicing/settlement/pricing currency 192

6.3.3 Global reserve currency 194

a RMB as a reserve currency 195

b The special drawing right (SDR) club 200

6.3.4 Other functions 204

6.3.5 Renminbi globalization index 205

6.4 Looking Forward 206

6.4.1 Offshore RMB markets 207

6.4.2 Domestic market reforms 208

6.4.3 Economic factors against political considerations 209

Chapter 7 Concluding Remarks 211

7.1 Experiences 212

7.2 Domestic Challenges 214

7.3 International Dimensions 224

7.4 China's Currency in the Global Financial System 226

References 231

Index 257