USD/CNY: Exchange rates

Abstract

Initially China followed a policy of keeping its exchange rate extremely low. However, it soon realized the adverse affects of its policy and started appreciating its currency. From the period of 2004 to March 3, 2012, Yuan appreciated by more than 23% and fluctuated between 8.2800 to 6.3039. The following graph shows us that condition of Yuan between 2004 and 2012.

China follows the policy of managed exchange rates. In other words, Chinese Yuan is not allowed to change its exchange rate according to the forces of demand and supply instead Chinese Government intervenes in the exchange rate market to set the rate it desires. Many experts argue against this policy. They believe that if Chinese government allows the currency market and forces of demand and supply to control the market, the USD/CNY exchange rate will be much higher. Although many economic theorists question the viability of such policy, but it has been proven that the policy has been pretty successful as China is lead the global economy. So much so that even President Obama stated that the Chinese policy of keeping their currency undervalued results in competitive disadvantage for American firms. We can look at the above scenario from the economic theory of fixed exchange rates.