Essay Example on China one of the world's largest economy

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Introduction China one of the world largest economy where having a drastically improve in global presence and involved in many international establishments since 1990s CIA 2017 The market evolution of China has moved from a centrally planned to market oriented economy since 1978 and has enjoyed quadrupled production in return The World Bank 2017 China also owned a huge population where playing a vital and influential role in development and global economy while also lead to a better standard of living and supply being increase to fulfil more consumer needs yet the government control remains tight China also named as an export led country with having a Gross domestic product GDP increases lead to increase the expansionary of production which acquire more labour and directly lifted most people out of poverty However China still a developing country with a half finished market reform due to the current poverty standard have much population of poor in rural areas Euromonitor 2017 Thus the transformation from middle income level to high income level in way more difficult then moving up from low middle income level to middle income level The instant economy revolution brings lots of challenges which comprises high inequality challenges in speedy urbanization imbalance from internal to external and the environment sustainability The World Bank 2017 China also issued from the demographic which related to increasing population in baby boomers and internal migration of labour Therefore the changes in exchange rate policy must be significantly stated in order to improve and sustain the China's economy growth Base on the research the most implication of market reform is from 1994 to 2010 of the free market fluctuations Within that time frame China have vast and sudden strategic movement with both internal and external economic factors Year 1994 2005 Dual Exchange Rate System Since year 1 January 1994 China was using two exchange rate system which are Pegged Exchange Rate System and Manage Floated Exchange Rate System the country's exchange rate policy

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One of the major changed to the currency is uniform of two types of exchange rate and China pegged the country's currency RMB with the United States US currency USD at the rate of 8 70 per dollar and at year 1997 the exchange rate of RMB to USD adjusted to 8 28 per dollar Morrison 2007 Implementation of two exchange rate policy was initiated by Asia financial crisis at that time Asia country s currency dropped drastically including China therefore China is using pegged system to hedge the RMB against crisis The slightly appreciation of RMB adjusted by People of China Bank PBC at year 1997 to avoid the undervalued of RMB and also aimed to directly stimulate the country's growth Frankel and Shang 2007 The purpose of the system is not only for the prevention of financial crisis but also act as a new exchange rate system for China as the foreign exchange market mechanism has been improved US Department of State 1990 With the pegged exchange rate system there are effect on US exporters and import competitors From the year of 1994 the enterprises and firms are required to buy or sell foreign exchange from the banks signified the end of foreign submission and retention due to the enforcement of the foreign exchange surrender system in China The commence of the new foreign exchange surrender system will simplifies the procedures for banks and firms in the use of foreign exchange Hilland and Devadoss 2013 As a result giving export firms incentives to benefits from export activities and earn foreign exchange

Besides this pegged system has also affected US borrowers There is an evidence shown that RMB remained undervalued against USD has an impact on US which there is a current account deficit on US when equivalent amount of capitals flow into US from China Fair 2010 When China investor are interest in US assets occur the increase in demand of US assets and place downward pressure on US interest rate and company are keen to invest in where that was previously unprofitable Pettis 2009 US interest rate would be higher if China has not influx capital inflow in big amount which makes the interest rate to be unfavourable for private firms to conduct investment or business and interest sensitive households for getting durable consumer appliances and housings In short appreciation of RMB could increase exportation of US to China and discourages China s necessity to invest in US capital securities which would directly raise US interest rates The government adopts dual exchange rate system that has changed from a socialist centrally planned economy to a socialist market oriented economy which industry is marked by the advancement in technology and increasing productivity acquired This policy allows the value of RMB to be sustain at a reasonable level which caused China's export more attractive and economy while export to US Morrison and Labonte 2013 When China accede to the World Trade Organization WTO the international trade in China is more freely since 2001 Especially in the shoreline economic areas and open coastal towns the joint ventures with foreign direct investment are encouraged In the short run Chinese s productions of goods and services will gain export competitive advantage than US productions hence this system will affect mostly firms in the manufacturing sector The obvious result will present in China's current account with trade surplus and aggregate demand for Chinese products and services will increase

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