Sample Economics Essay Paper on Emerging Markets: Examining Chinese Currency against the U.S Dollars

China presently has one of the most promising economies in the emerging markets. Over the past decade, the Chinese economy has grown exponentially. This is because China is experiencing rapid industrialization in many sectors of the economy such as the aircraft, machinery, telecommunication, and textile industry. The growing economy is also because most of the Chinese people being in the middle class, over 250 million citizens in the middle class and earning a modest per-capita income of $6,800, which serves as a signal for a dynamic market economy (Nymalm & Nicola 31).

Today, worlds’ economic leaders are closely monitoring the Chinese economy and Chinese currency. In 2007, the Chinese economy ranked as the second largest economy in the world, as a result, international investors are keen to observe and understand any changes or developments within the Chinese economy. In recent years, the Chinese currency is showing a positive trend against the U.S dollar. This paper is a close macroeconomic analysis of the position of Chinese Yuan against USD for the five-year period from 2005 to 2010.

The Chinese currency is the Yuan or Renminbi. In the past, the Chinese currency was not popular because its government had a very strict intervention to limit the appreciation of its currency, the Renminbi (RMB). Prior to 2005, the Chinese government adopted a policy of pegging the RMB to the U.S dollar, where the Chinese central bank maintained the exchange rate at approximately 8.28 Yuan. It ensured that there was no excess demand or supply of U.S dollars by buying or selling as many units of the dollar as possible to eliminate demand for the Yuan. The Chinese government used this strategy to promote a relatively stable environment for investment and foreign trade in China. However, beginning July 2005, China began to gradually adjust its currency policies and between then and 2013, the RMB has appreciated by almost 34% against the U.S dollar (Morrison et al. 10).  

From 2005 to 2008

The Chinese government modified its policies on July 21, 2005, such that the exchange rate for the U.S dollar against the RMB appreciated by 2.1% from 8.28 Yuan to 8.11.  It announced that the exchange rate would become adjustable according to the market supply and demand with reference to exchange rate movements of currencies in a basket. This situation is described as “management float” where the market forces determine the general direction of a currency movement. Even so, the Chinese government controlled its rate of appreciation through market intervention. The Chinese government allowed the currency to fluctuate by 0.3% – 0.5% on a daily basis against a selected basket (Morrison et al. 2).  During this period to July 21, 2008, the dollar- RMB exchange rate went up from 8.11 to 6.83, an appreciation of 18.7%.

From 2008 to 2010

In the year 2008, Chinese government halted the RMB appreciation. This is because there was a declining demand for its export products because of the global financial crisis that saw Chinese exports fall by 15.9% in the year 2009 (Morrison et al. 6).  China reported high levels of unemployment during the year 2009, with several factories shutting down over 20million people lost their jobs. The government intervened by maintaining the dollar- RMB exchange rate relatively at 6.83 to mid-June 2010.

On June 19, 2010, Chinese central bank, the People’s Bank of China (PBC) decided to proceed with the initial reforms of the RMB exchange rate flexibility. The Chinese government stated the need to avoid sharp fluctuation rates in the RMB exchange rate. As a result, the dollar-RMB rate went from 6.83 in 2010 to 6.17 in 2013, which is an appreciation of 10.7% (Nymalm & Nicola 29). The sharpest appreciation of the RMB against the dollar in the five-year period occurred in the year 2008 when the currency rose against the dollar by 9.4%.

It is important to analyze factors that affect a currency pair exchange rate such as the interest rate, inflation, and unemployment because the exchange rate is an important indicator of a country’s relative level of economic performance. The exchange rate is important because it plays an important role in a country’s level of trade and as a result, it is the most manipulated, watched and analyzed economic measure.   They define a nation’s trading relationship with other countries because it determines the price of imports and exports (Gagnon & Joseph 43). A low exchange rate makes imports more expensive and exports cheaper whereas a higher exchange rate makes exports more expensive and imports cheaper.

Moreover, a high exchange rate lowers a country’s balance of trade and a lower exchange rate increases it. The Chinese government is notorious in manipulating the exchange rate and as a result, the U.S dollar and the Chinese Yuan exchange rate have been marred with controversy between the two countries. The U.S government has tried several ways to get China to adjust its policies regarding its currency but it has failed (Morrison et al. 20). As a result, China holds large foreign reserves. There is a direct correlation between the Chinese and U.S dollar and as a result, it has led to rising unemployment in the United States.

In conclusion, the underlying macroeconomic imbalances between China and the U.S are unlikely to disappear. For a long period, China has been a high-saving country while the U.S has been a low-saving country. This means that China will continue to be a net creditor even if RMB rose in value. In addition, China plays a big role in the global supply chain, as a major assembly point for multinational corporations (Morrison et al. 27).

Work Cited

Bergsten, C F, and Joseph E. Gagnon. Currency Manipulation, the Us Economy, and the Global Economic Order. Washington, D.C: Peterson Institute for International Economics, 2012. Print.

Gagnon, Joseph E. The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances. Washington, D.C: Peterson Institute for International Economics, 2013. Print.

Morrison, Wayne M, and Marc Labonte. China’s Currency: An Analysis of the Economic Issues. Washington, D.C.: Congressional Research Service, 2010. Print.

Nymalm, Nicola. The End of the “liberal Theory of History”?: Dissecting the U.s. Congress’ Discourse on China’s Currency Policy. Hamburg: GIGA, 2011. Print.

Rusek, Antonin, Lubor Lacina, and Jarko Fidrmuc. The Economic Performance of the European Union: Issues, Trends, and Policies. Basingstoke: Palgrave Macmillan, 2009. Print.