Renminbi

Downward adjustment in import volume is expected while export volume will

rise as the export prices expressed in dollars become more competitive. This will result in an

Our findings of a bidirectional causal relationship between the movements in the real

exchange rate and the prices variables confirm the presence of a vicious circle hypothesis,

implying that the devaluation of the Chinese currency sets in motion inflationary effect on the

prices which in turn cause further devaluation of the currency. This partially explains why in

the past the Chinese government has been very cautiously to devalue its highly over-valued

currency. Our results also suggest that the changes in exchange rate are much a consequence

as a cause of trade movements. Changes in the exchange rate of the RMB alone seem less

likely improve the trade balance. Under the current economic system, an RMB devaluation

can improve China’s trade balance only if it is accompanied by other policies.

23

By 1991 exports and imports

subject to mandatory planning had fallen to 30 percent and 20 percent of their respective

totals, while the guidance plan accounted for 15 percent and 20 percent, respectively. As the

role of trade plan has declined, direct control over exports and imports has continued through

a licensing system which covered 55 percent of exports and 40 percent of imports in 1991

(Bell et al., 1993).

In

China has repeatedly devalued its currency

1

as a means of promoting exports and the balance of trade in the 1980s and the early 1990s.

In 1991, China altered its foreign exchange policy from the relatively large, one-step currency

devaluation of the past to more frequent, small-scale adjustments as ways of fine tuning the

Renminbi’s (RMB) value according to prevailing conditions. The unification of China’s two

main currency rates in the beginning of 1994 and the deregulation on foreign invested

enterprises in exchanging funds freely at selected banks without...