Assignment

BFW3331 International Banking and Finance Internal Assignment Task for Semester 1, 2014 This is an individual assignment task which carries 30% of the marks for this unit. Assignment due on 9th May 2014 at 4.00pm Question 1 (20 marks) Is the Chinese Renminbi still undervalued? By Jothee Sinnakkannu After pegging the Chinese renminbi (RMB) to US dollar (USD) at an exchange rate of 8.28/USD for more than a decade, the People’s Bank of China (PBOC) announced a revaluation of its currency and to reform the exchange rate regime on July 21, 2005. For most of its early period, this pegged exchange rate regime attracted little criticism. Indeed, it was widely seen as contributing to internal and external stability. Under the RMB/USD peg system, China had experienced a dramatic growth since 1995. Its average Gross Domestic Product (GDP) growth has been about nine percent per annum while 3.3 percent in the US and 2.2 percent in the European Union (EU). China’s exports increased from USD121 billion in 1994 to USD762 billion in 2005 and to USD 1.43 trillion in 2008. This phenomenal increase in China’s exports were attributed to the pegged regime during the 90’s and early 2000, but the continuous increase of its exports even after the RMB/USD de-pegging raises issues on the evolution of the RMB and its value in real terms against the USD. Since 2003, the widening US trade deficit with China (which totaled to USD202 billion or 6.5 percent of US GDP in 2005) has led to disputes against RMB/USD peg system. There has been mounting external and internal pressure on China to de-peg the RMB and to appreciate against the USD since 2002. The pressure to de-peg RMB came from both, the foreign countries which were feeling that China has been enjoying unfair international trade competitiveness and the local export businessmen who were feeling that their exports are undervalued in terms of foreign currency, especially the USD. There was a widespread view that the RMB was significantly...