Since China has widely opened its doors to foreign trade we have seen a boom in its exports and an increase in international payments to the country. Many importers have come flocking to take advantage of the cheap prices and vast range of goods on offer.
Apart from cheap labour and abundance of raw materials that has enabled them to offer such low prices, China has also benefited from utilizing its monetary policy for receiving international payments to its advantage.
The national currency of China is the renminbi (Chinese yuan); however international trade is mainly conducted in dollars. Importers wishing to purchase goods from suppliers in China would have to make their international payments in dollars as historically the renminbi has been pegged to the dollar.
The reason for this is that the Chinese Government has restricted the renminbi to float freely on the open currency market and appreciate accordingly. From not doing so has undervalued the currency considerably.
This has benefited China by giving them an increasing competitive edge in the export market with importers favouring cheaper Chinese goods.
It has sparked political debate especially from the US from the gains of China undervaluing the currency and increasing its export power. It has also allowed China to hedge themselves against the international economic downturn which affected many exporters around the world.
China has not succumbed to international pressures to immediately float their currency freely and has chosen to adopt a gradual approach to releasing the renminbi.
Rise of the Renminbi
In recent times we have seen developments, and China has now starting to encourage its export businesses to deal in the renminbi when trading with foreign buyers.
This is an early indication of China relaxing the restrictions on its national currency. In terms of international payments to China we will begin to see more in flow and out flow of the currency in China.
Again, it is still a slow implementation by China to internationalize the currency, as it enables them to examine the effects and discuss the benefits and detriments of doing so.
If China is satisfied, we could see an increasing trend in international payments being conducted in renminbi. It is to be expected that the renminbi will rise if China continues to release the grip around its currency and it will begin to gain its true value in the market.
China will undoubtedly be watching closely as they look to position the renminbi in the international arena and will be looking at the renminbi as a likely reserve currency for the future.
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