Slide 3 : There are some factors that influencing country economy: first it’s their interest rate, and then inflation and also exchange rate. Why exchange rate? The answers is because exchange rate play vital role in country’s level of trade which is critical to most every free market economy in the world. And as we can see that if our currency low so a country may gain its advantage in international trade and typically national bank play vital role in this situation.

And today I will talk about, (press to NEXT slide)

Slide 4 : CHINA, Known as the fastest developing county in the world with its big numbers of citizens. They currency is called Renminbi and with the symbol as we can see on the slide, This renminbi is called the people currency for 50 years and the development of china is really big like we saw in everyday life, most of the things is “made in china” (see the pic in the slide) as we can see on the pic, almost half of world clothes and computers is made in china and excetera.

Slide 5 : A cornerstone of China’s economic policy is managing the exchange rate by keeping the currency artificially low. Most advanced economies such as USA, JAPAN, United Kingdom etcetera usually have a floating exchange rate that is determined by market forces, but not China. Instead to float their currency China prefer to pegs its currency, to the U.S. dollar. And this policy is know as… The Crawling Peg.. So what is Crawling Peg? (press to the DEFINITION) so Crawling Peg is (Read the definition)

Slide 6 : So this is how to peg your currency against dollar. As you can see on the slide, for example, 1 Chinese Yuan = 0.16 Dollars . ( 1 Dollar = 6.13 Yuan.) so the Chinese Yuan is still undervalued because many believed that yuan is undervalued for 20% and so it will become 1 Chinese Yuan = 0.20 Dollars

(or 1 Dollar = 5 Yuan). If the Chinese currency did appreciate then the currency would be no longer pegged against the dollar.

Slide 7 : So there is a question that, The Chinese currency has been a contentious issue for the past several years for the United States and other countries? And the answer is that The root of the conflict is complain that China keeps the value of the RMB artificially low, boosting its exports and trade surplus at the expense of trading partners.

Although the U.S. Treasury has repeatedly stopped short of labeling China a “currency manipulator” in its twice-yearly reports to Congress, it has consistently pressured China to allow the RMB to appreciate at a faster pace, and to let the currency fluctuate more freely in line with market forces. And that’s proved by… (Read the slide)

Slide 8 : As we talked about in the previous that national bank plays a vital role in the manipulating the currency and in China, The People Bank of China giving a daily reference rate of Yuan so that it can peg to the Dollar.

This the exchange rate of RMB vs USD per November 2014. As we can see that the currency still pegged to the USD.

And also…. (Read the Slide, This relentless dollar…)

Slide 9 :

Slide 10 : A lower exchange rate lowers the price of a country's goods for consumers in other countries, but raises the price of imported goods and services, for consumers in the low value currency country. In general, a country that exported goods and services will prefer a lower value on their currencies, while a country that imported goods and services will prefer a higher value on their currencies… (Read the slide)

Slide 11 : In a free market demand for Yuan would rise relative to the dollar. This would cause one Yuan to be worth more. However, the Chinese government can intervene – selling Yuan and buying dollar assets. When the Chinese Central Bank purchases large quantities of dollar assets, such as US Treasury Bills. This demand for dollars, increases the value of the dollar compared to the Chinese Yuan. If they completely stopped buying dollars and started selling their dollar assets (e.g. US bonds) and saved the money in China then there would be a rapid decline in the value of the dollar, and the Yuan would appreciate rapidly… (Read the slide)

Slide 12 :

Slide 13 : Despite the benefits of a weak currency. It also has some problems for the Chinese economy

• A weak currency creates inflationary pressure. A weak currency means commodity prices are more expensive. Since China is a big importer of commodities, a weaker exchange rate increases the cost of living and the cost of raw materials. The Government have allowed a small appreciation in the exchange rate to help mitigate inflationary pressure.

• China is seeking to divesify away from dollar assets. To maintain a weak exchange rate, the Chinese need to keep buying dollar assets. However, many are worried about holding so much dollar assets given weakness of US economy. Therefore, China is seeking to diversify away from US dollar, but, by doing this the exchange rate will appreciate.

• Criticism from US. I doubt China give too much importance to complaints from US politicians, but, at the same time they can’t afford to completely ignore the biggest purchaser of Chinese goods. It is in the interest of China to have a strong US economy.

Slide 14 : Unlike many developed countries that use pure floating exchange system, China used managed floating exchange rate system. This currency value is maintained by imposing foreign exchange controls. So how to increased the value of its currency china needs to : First, revalue the exchange rate and allow its currency to rise according to market demand. Second, higher interest rates to attract investment and last, tighter fiscal policy would help appreciate the exchange rate in the long term.

Slide 15 : Consistent intervention by China to keep its exchange rate substantially below the level the market would set is a price distortion that prevents international markets from functioning as well as they could.

This price distortion also affects China’s own economy, by encouraging large-scale investment in export manufacturing, and discouraging investment in the domestic consumer market. Thus, it is in the interest both of China itself and the international economy as a whole for China to allow its exchange rate to rise more rapidly.