Monetary System of China

Since 1800, there has been a historical evolution and overview of the Chinese currency and monetary system. The nation has established a theoretical framework that heavily depends on the virtual fee of the fundamental criteria of some other exchanges, such those using dollars from the United States of America (Naughton, 2007). In order to establish the country's march toward a more liberalized financial market, this study will be built around a simple historical insight that connects the key institutional, organizational, and political changes when it comes to the China monetary regime. In addition, this paper will describe the synopsis of the country’s financial system and also the wide-ranging monetary and fiscal policy recreation and a variety of monetary systems restructurings and the difficulties associated with them. Also, the open doors when it comes to the China’s derivative markets particularly under the future of the China’s exchanges which is after the future industry regulator made the move of publishing different regulations that would see the framework that normally enables foreign investors, as well as the entities to take part in the speculative as well as hedging processes in the market, will be explained (Naughton, 2007). China has a variety of developments when it comes to the monetary and fiscal areas which are greatly associated with impacts to the country’s renminbi currency value.

Evolutions of the China’s Monetary Systems

China is greatly known to have the oldest world civilizations whereby its culture being traced over the past three thousand years. Due to the country’s incredible continuity when it comes to their chronological circumstantial played a very significant part particularly in the growth of the country’s financial system in the prehistoric times. Being the first evolution to have dispersed the flat paper cash prior to its introduction to the western countries, it helped the country to have an experience with the detrimental impacts of the economy, for example, deflation and inflation which is greatly known by the modern society.

Prior to the introduction of paper money, goods were being exchanged with some other goods taking for example of the copper and gold as these commodities were greatly valued, portable and also long lasting (Chow, 2015). For instance, in the 24th century, BC was highly featured by the use of shell currency whereby there was the use of tortoise shells to purchase the expensive products. However, four centuries later, shells were replaced by gold whereby it turned to be the intermediate of conversation while shells were considered as a way of storing riches.

In the 11th century BC, the government of China’s initiated regulating their currency with the dynasty of Zhou king named Tcheng which prompted the founding of the treasury offices in order to come up with rules that would restrict currency (Peterson, 2016). When it comes to different fines, they were imposed in relation to the weight of metals and different administration institutions of leading sprung up which was after the growth of using credit systems. Under the leadership of the Zhou dynasty, Chinese greatly implemented the use of bronze money with the reason being to the company the simulated instruments as it was enthusiastically accessible than either gold or silver. Moreover, it was greatly prized when it comes for different religious and social determinations which were afore the start of using coins in the late 3rd century BC.

Right after the implementation of using coins, there was a great debate regarding whether enterprises that are private were really acceptable to use coins or whether the coins was simply a lone state entitlement which resulted to the fiscal policy question to turn out as a significant big necessity. This resulted to the abolishment of the private coinage which leads to the implementation of money by the Chinese government in the 135 BC which greatly required people to start using coins. However, there were many cases involving counterfeiting that were being reported which saw the government adopt a variety a series of policies with an objective of curbing these problems where the solution to this was the introduction of the paper money.

Paper money happened to be greatly accepted as it was convenient and also of light weight. It greatly encouraged free trade between regions in China and also widely used when it comes to a variety of transactions of any size whereby it was also being used by the government with an objective of financing military expenditures. As a result, this increased circulation of paper money resulting to its wider acceptability.

China greatly integrated with the world in the 16th century whereby the country’s goods were brought by the Europeans and the Japanese whereby In order to purchase these goods, they were required to use raw copper. However, the integration of China with the rest of the world, it made the country vulnerable to frequent changes when it comes to the price and quantity of silver in the global market (Chow, 2015). As a result, it failed to be self-sufficient as it turned to be subject to the economic challenges. Due to the opium war as well as the treaty of Nanjing in the year 1842, Chinese were made to open their ports by the British which meant opening the economy to the outside interests. The point here is that China lacked a greatly renovated financial system until the revolt when the government gave the directions towards the use of notes as an accepted medium of exchange.

Therefore, when it comes to the reality of the current monetary system in the country, it happened to be solitary made probable with the actuality of a constant writing system as well as the stability of their lengthy culture alongside the national control right from the power amalgamation under the leadership of Qin Dynasty (Peterson, 2016). As a result, this got the government having a high confidence when it comes to the recent years with the objective of having self-reliance in the paper money and also subject their currency on a degree that the government from western countries will lack the capability of copying for many years.

Just before the initiation of the People’s Republic of China, it happened that the people’s bank of China started operating as a divergent financial institution with the objective of taking care of the fiscal system of the state whereby it greatly took deposits as well as transferring the income to the central bank while at the same time disturbing loans. The central government was given the obligation of coming up with fiscal and monetary policy through the people’s bank of China.

Components of the China’s Monetary Systems

In normal cases, monetary policy constitutes of the phases that are normally engaged by the central bank towards influencing the costs of money, credit as well as their accessibility and the economy supply which aids achieve national goals. In China, such kind of the strategy is created by the People’s Bank of China which is very comparable to the Federal Reserve of the United States of America which leads them to employ different policies that promote the economic development towards making sure that the stability of the Chinese financial industry (Eichengreen, & Lombardi, 2017, pp. 50-60).

In the past years, China has always maintained its main aim as to continue towards attaining the economic development and also maintaining the inflation at the level that is minimum. However, in the year 1994, China experienced the premier inflation ever which was at 24% which was greatly credited to the scarcities that impact from the massive cash flow in the preceding years which greatly transformed to a significant advancement of the financial base. In addition, there were cases of liberalization of charges in the country and also the impact of the Republic Bank of the Country’s neutering when it comes to the China’s policy which greatly underpins the currency wars of the universe. In response to this, the government restricted the monetary policy which results in reduced supply of money while at the same time increasing the interest’s rates as well as the minimum ratio of the reserve.

Also, the people’s bank of China significantly made use of open market operation with an objective of reducing the supply of money. In the process, it managed to rise when it comes to the liquidity hence making an intervention to help in reducing the risk of the currency appreciation through purchasing of the treasury from the foreign state's bills whereby they owned a solid debt of $900 out of the $4.3 trillion (Eichengreen, & Lombardi, 2017, pp. 50-60). In addition, they also achieved to have certain repurchases as well as bills with the aim being to advance their efficiency of the Open Market Operations.

Regardless of the previous inflationary pressure that resulted from a variety of economic conditions, as a result of having policies alignment, China greatly forms a variety of institutions which are seeing the country emerge as the world power. In normal cases, most economists tend to believe that the country of China stands greater chances of becoming a strong world economy when it comes to the current changing world as a result of having monetary as well as fiscal policies together with the actual value of Yuan (Eichengreen, & Lombardi, 2017, pp. 50-60).

Currency Exchange Rates

China is significantly known to maintain its dual exchange system before the year 1994 whereby it had a static endorsed exchange rate that was being implemented by government and also the moderately market centered exchange rates that were greatly being employed by the overseas exchange dealers in the exchange's marketplace (McKinnon, & Schnabl, 2014, pp. 1-35). As a result of the foreign exchange being highly discouraged with an objective of reducing the imports, there happened to be a black underground market meant for the foreign goods. However, there were a number of critics taking for example of the USA whereby it had an issue with the dual exchange in the country as a result of the restrictions that were placed in the importation of foreign goods. This prompted the government to initiate a unified exchange rate of initial rate of 8.7 yuan to the dollar. China’s government greatly maintained a pegging policy since the year 1994 to the year 2005 whereby the policy involved the RMB to the dollar which was to be given at an exchange rate of an estimation of 8 to the dollar currency (McKinnon, & Schnabl, 2014, pp. 1-35). As a result, this facilitated a suitable and a steady environment when it comes to the foreign trading activities in the nation as it prohibited the hefty fluctuations in different rates of exchange.

In the year 2008, China’s government stopped the policy of appreciation of the currency as a result of the reducing demand for the different Chinese products in the world which was as a result of world financial crisis. In the year 2009, the country’s export happened to reduce by 15.9% and also a number of export-related industries were shut down which saw over 21 million immigrants to lose their jobs as a result of direct effects of the world economic crisis.

As a result of the economic conditions that were there in the year 2010, through the people’s bank of China, the government China took the move of announcing that it had come up with a verdict to move on with alterations of the RMB and different regulations of exchange rate with an objective of enhancing the flexibility of exchange rate. Though the announcement of the RMB exchange rate with the dollars had significantly risen up and fallen in many instances, the overall impacts are that it has currently appreciated.

Exchange Rates Exposure

This is generally the risk that fluctuations lead in any China-based company whereby they receive reduced RMB quantity as compared to the initially expected one. For the companies that import foreign goods, there is a high probability that the rates instabilities will see firms paying more than what was initially premeditated. In most cases, the Chinese involvement in the export trade, they are always getting great publicity to the USA dollars (McKinnon, & Schnabl, 2014, pp. 1-35).

The process of managing foreign exchange exposure is very crucial when it comes to the Chinese firms as it provides a variety of advantages. To mention some, it helps in the process if predicting the future cash flows and also reducing the adverse impacts of the exchange rates fluctuations when it comes to the firm’s profit margin. Usually, managing of the exposure rates helps in protecting a firm’s competitiveness when the value of the RMB tends to rise resulting the company to have more time to help improve profitability (McKinnon, & Schnabl, 2014, pp. 1-35).

The managing of the foreign exchange exposure to risk is carried out using four major steps. The first step involves identifying and measuring of the foreign exchange exposure with the main focus being o the transaction risks. The second step involves initiating a rule on foreign exchange sanctioned by the high-ranking board of a firm. Thirdly, it involves putting in place the hedges that are in agreement with the firm’s rule. Lastly, it involves periodically evaluating if the hedges are efficiently counteracting the firm’s exposure.

To manage foreign exchange rates exposure, Chinese companies use two major methods which are the financial and natural hedging. For the natural hedging, it aims at reducing the difference that tends to take place between the receipts and the payments that are given in a foreign currency. On the other hand, financial hedging aims at including the buying foreign exchange equivocation mechanisms that are normally traded by different banks and foreign monetary agents.

Derivatives Markets-Future and Options

In normal cases, derivatives refer to conventions that usually binge exposure to the probable uncertainties as well as prizes of different resources. In China, the key milestone that resulted in the growth and foundational of its derivative marketplaces was the initiation of the Shanghai-Hong Kong stock competition (McKinnon, & Schnabl, 2014, pp. 1-35). The implication of this was that China will be giving an opportunity to the overseas investors towards accessing its derivatives, particularly in the future exchange. This made China’s future market to acquire a market attraction to the other foreign investors as a result of their immense magnitude. China has quite a good number of reforms when it comes to the derivatives markets offers investors globally with many opportunities across the different chain and customer centers where the value traders are required to have fresh exchanges.

Conclusion

China’s government is greatly initiating more opportunities in the business whereby it is subsidizing over one-third of the financial development of the global by the year 2016. In addition, it is the second major sole economy which makes it a key export and an import center which are greatly attributing to the various phases the government has initiated towards stabilizing the fiscal system of China. RMB situation continues to play critical role in the markets globally as a result of its acceptance and adoption when it comes to the cross-border trade exchange and settlements internationally.

References

Chow, G. C. (2015). China's economic transformation. John Wiley & Sons.

Eichengreen, B., & Lombardi, D. (2017). RMBI or RMBR? Is the Renminbi Destined to Become a Global or Regional Currency? Asian Economic Papers, pp. 50-60

McKinnon, R., & Schnabl, G. (2014). China's exchange rate and financial repression: The conflicted emergence of the RMB as an international currency. China & World Economy, 22(3), 1-35.

Naughton, B. (2007). The Chinese economy: Transitions and growth. MIT press.

Peterson, W. J. (Ed.). (2016). The Cambridge History of China: Volume 9, The Ch'ing Dynasty to 1800. Cambridge University Press.