3. What is an Exchange Rate?
• CONTENTS
• 1. İNTRODUCTİON
– The Importance of Exchange Rates in the Global
Economy
– Impact on International Trade and Investment
• A. International Trade
• B. International Investment
– Types of Exchange Rate Policies
• Fix” or “peg” their exchange rate.
• Floating” or flexible exchange rate.
4. – General Debates over “Currency Wars”
– Specific Debates over Exchange Rates
– Currency Interventions
• 2. Overview of China Economy (Macro
Policy).
• 3. China Exchange rate regime.
• 4. New Asian Currency
• 5. Recommendation and conclusion
5. • 1.1 The Importance of Exchange Rates in the
Global
• Economy
• What is an Exchange Rate?
• An exchange rate is the price of a country’s
currency relative to other currencies. In other
words, it is the rate at which one currency can be
converted into another currency. For example, on
August 30, 2013, one U.S. dollar could be
exchanged for 0.76 Euros (€), 98 Japanese yen
(¥), or 0.65 British pounds (£).8
6. Continue .....
• Consumers use exchange rates to calculate the
cost of goods produced in other countries.
• How much a currency is worth in relation to
another currency is determined by the supply and
demand for currencies in the foreign exchange
market (the market in which foreign currencies are
traded).
• Trading in foreign exchange markets averaged
$5.3 trillion per day in April 2013, up from $3.3
trillion in April 2007.
7. • A. International Trade
• Exchange rates affect the price of every export
leaving a country and every import entering a
country. As a result, changes in the exchange rate
can impact trade flows. When the value of a
country’s currency falls, or depreciates, relative to
another currency, its exports become less
expensive to foreigners and imports from overseas
become more expensive to domestic consumers.
These changes in relative prices can cause the
level of exports to rise and the level of imports to
fall.
8. • B. International Investment
•
• Exchange rates impact international investment in
two ways. First, exchange rates determine the
value of existing overseas investments. When a
currency depreciates, the value of investments
denominated in that currency falls for overseas
investors. Likewise, when a currency appreciates,
the value of investments denominated in that
currency rises for overseas investors.
9. • For example, if a U.S. investor holds a German
government bond denominated in Euros, and the
euro depreciates, the value of the bond in U.S.
dollars falls, making the investment worth less to the
U.S. investor. And vice vs.
• Second, exchange rates impact the flow of
investment across borders. For example, a
depreciating euro may deter U.S. investment in the
Eurozone, while an appreciating euro may increase
U.S. investment in the Eurozone.
10. • 1.3. Types of Exchange Rate Policies
• fix” or “peg” their exchange rate.
• floating” or flexible exchange rate.
•Source: IMF, “Annual Report on Exchange Arrangements and Exchange Restrictions,” 2012.
11. Source: IMF, “Annual Report on Exchange Arrangements and Exchange
Restrictions,” 2012.
• 1.4. General Debates over “Currency Wars”
• Amid heightened concerns about slow growth and high
unemployment in many countries, disagreements over
exchange rate policies have broadened after the global
financial crisis.
• In2010, Brazil’s finance minister, Guido Mantega,
declared that a “currency war” had broken out in the
global economy.20
• At the heart of current disagreements is whether or not
countries are using policies to intentionally push down
the value of their currency in order to gain a trade
advantage at the expense of other countries.
12. • A weak currency makes exports cheaper to
foreigners and imports more expensive to
domestic consumers. This can lead to higher
production of exports and import- competing
goods, which could help spur export-led growth
and job creation in the export sector.
• However, if one country weakens its currency,
there can be negative implications for certain
sectors in other countries. In general, a weaker
currency in one country can hurt exporters in other
countries, since their exports become relatively
more expensive and may fall as a result.
13. • Additionally, domestic firms producing import-
competing goods may find it harder to compete with
imports from countries with weak currencies, since
weak currencies lower the cost of imports. Under
certain circumstances, policies used to drive down the
value of a currency in one country can cause other
countries to run persistent trade deficits (imports
exceed exports) that can be difficult to adjust and can
be associated with the build-up of debt.
• For these reasons, some economists view efforts to
boost exports through a weaker exchange rate as
“unfair” to other countries and a type of “beggar-thy-
neighbor” policy—the benefit the country gets from the
policy comes at the expense of other countries.
14. • 1.5. Specific Debates over Exchange Rates
• In current debates about exchange rates and
whether countries are engaged in unfair currency
policies to weaken their currencies, two major
types of concerns have been raised: first,
concerns about countries engaged in interventions
in foreign currency markets, and second,
concerns about the effects of expansionary
monetary policies in some developed countries on
exchange rate levels.
15. • 1.6. Currency Interventions
• Governments have various mechanisms they can
use to weaken, or devalue, their currency, or
sustain a lower exchange rate than would exist in
the absence of government intervention. One way
is intervening in foreign exchange markets or, more
specifically, selling domestic currency in exchange
for foreign currency. These interventions increase
the supply of domestic currency relative to other
currencies in foreign exchange markets, pushing
the price of the currency down
16. 2. Overview of China Economy (Macro Policy),
• Since the late 1970s China has moved from a
closed, centrally planned system to a more market-
oriented one that plays a major global role - in
2010 China became the world's largest exporter.
• Also keeping its currency tightly linked to the US
dollar for years, in July 2005 China revalued its
currency by 2.1% against the US dollar and moved
to an exchange rate system that references a
basket of currencies. From mid 2005 to late 2008
cumulative appreciation of the reniminbi against
the US dollar was more than 20%,
17. • but the exchange rate remained virtually pegged to the
dollar from the onset of the global financial crisis until
June 2010.
• The government's 12th Five-Year Plan, adopted in
March 2011, emphasizes continued economic reforms
and the need to increase domestic consumption in
order to make the economy less dependent on exports
in the future.
• GDP (purchasing power parity)
• $12.61 trillion (2012 est.)
$11.7 trillion (2011 est.)
$10.7 trillion (2010 est.)
note: data are in 2012 US dollars
18. GDP (official exchange rate)
• $8.227 trillion
note: because China's exchange rate is determine
by fiat, rather than by market forces, the official
exchange rate measure of GDP is not an accurate
measure of China's output; in China's situation,
GDP at purchasing power parity provides the best
measure for comparing output across countries
(2012 est.)
• GDP - real growth rate
• 7.8% (2012 est.)
9.3% (2011 est.)
10.4% (2010 est.)
19. • GDP - per capita (PPP)
• $9,300 (2012 est.)
$8,700 (2011 est.)
$8,000 (2010 est.)
note: data are in 2012 US dollars
• Gross national saving
• 50.4% of GDP (2012 est.)
51.1% of GDP (2011 est.)
52.1% of GDP (2010 est.)
20. • GDP - composition, by end use
• household consumption: 35.7%
government consumption: 13.5%
investment in fixed capital: 46.1%
investment in inventories: 2%
exports of goods and services: 26.9%
imports of goods and services: -24.1%
(2012 est.)
• GDP - composition by sector
• agriculture: 10.1%
industry: 45.3%
services: 44.6%
(2012 est.)
21. • Population below poverty line
• 13.4%
note: in 2011, China set a new poverty line at RMB
2300 (approximately US $3,630)
(2011)
• Labor force 798.5 million
note: by the end of 2012, China's population at
working age (15-64 years) was 1.0040 billion
• Labor force - by occupation
• agriculture: 34.8%
industry: 29.5%
services: 35.7%
(2011 est.)
22. • Unemployment rate
• 6.5% (2012 est.)
6.5% (2011 est.)
note: registered urban unemployment, which excludes
private enterprises and migrants, was 4.1% in 2012
• Household income or consumption by percentage
share
• lowest 10%: 3.5%
highest 10%: 15%
note: data are for urban households only (2008)
• Distribution of family income - Gini index
• 47.4 (2012)
48.4 (2007)
23. • Investment (gross fixed)
• 46.1% of GDP (2012 est.)
• Budget
• revenues: $1.857 trillion
expenditures: $1.992 trillion (2012 est.)
• Taxes and other revenues
• 22.6% of GDP (2012 est.)
• Budget surplus (+) or deficit (-)
• -1.6% of GDP (2012 est.)
24. • Public debt
• 31.7% of GDP (2012 est.)
38.5% of GDP (2011)
Inflation rate (consumer prices)
• 2.6% (2012 est.)
5.5% (2011 est.)
• Central bank discount rate
• 2.25% (31 December 2012 est.)
2.25% (31 December 2011 est.)
• Commercial bank prime lending rate
• 6% (31 December 2012 est.)
6.56% (31 December 2011 est.)
26. • Debt - external
• $770.8 billion (31 December 2012 est.)
$685.4 billion (31 December 2011 est.)
• Stock of direct foreign investment - at home
• $1.344 trillion (31 December 2012 est.)
$1.232 trillion (31 December 2011 est.)
• Stock of direct foreign investment - abroad
• $502 billion (31 December 2012 est.)
$424.8 billion (31 December 2011 est.)
27. • Exchange rates
• Renminbi yuan (RMB) per US dollar -
• 1 Chinese Yuan equals
0.16 US Dollar
• 1 US Dollar equals
6.24 Chinese Yuan(2014)
• 6.3123 (2012 est.)
6.4615 (2011 est.)
6.7703 (2010 est.)
6.8314 (2009)
6.9385 (2008)
28. 3. China Exchange rate regime
• China uses managed exchange rate regime.
• 1 Dollar/6.25 Chinese Yuan.
• Over the past decade, the Chinese government has
tightly managed the value of its currency, the
renminbi (RMB) or yuan, against the U.S. dollar.
Some policy makers and analysts believe that China’s
currency policies keep the RMB undervalued relative
to the U.S. dollar. They argue that China’s policies give
Chinese exports an “unfair” trade advantage against
U.S. exports and are a major contributing factor to the
U.S. trade deficit with China. In 1994, China began to
peg its currency to the U.S. dollar and kept it pegged
to the U.S. dollar at a constant rate through 2005.
29. • In July 2005, it moved to a managed peg system, in
which the government allowed the currency to
fluctuate within a range, and the currency began to
appreciate. In 2008, China halted appreciation of the
RMB, due to concerns about the effects of the global
financial crisis on Chinese exports. In 2012, China
again allowed more flexibility in
• the value of the RMB against the U.S. dollar.
Between 2005 and the end of 2012, the RMB
• appreciated by almost 25% against the dollar (Figure
1).
30. • The Chinese government has used various policies,
including intervening in foreign currency markets and
capital controls, to manage this appreciation of the
RMB against the U.S. dollar. It does so primarily by
printing yuan and selling it for U.S. currency and
assets denominated in U.S. dollars, usually U.S.
government bonds. It also manages the value of its
exchange rate through capital controls that limit buying
and selling of RMB.29 As China has engaged in
currency interventions, its holdings of foreign
exchange reserves have increased, from $715 billion
in the first quarter of 2005 to $3,463 billion in the first
quarter of 2013 (Figure 2), equivalent to about
• 38% of China’s GDP.
31. • They point to the fact that foreign exchange reserves
have not grown as quickly since 2011 as some
evidence of this adjustment. In July 2012, the IMF
changed its assessment of the RMB’s value from
significantly undervalued to moderately undervalued
32. New Asian Currency
Source: Bank for International Settlements, “Foreign
Exchange Turnover in April 2013: Preliminary Global
Results,” Triennial Central Bank Survey, September
2013, https://www.bis.org/publ/rpfx13fx.pdf.
4. New Asian Currency
• There are many reasons for the decline of the value of
the US dollar over time, and today the central bankers
of Asia from China to Japan have realized that the time
has come for the creation of a new mega currency
similar to the euro: the New Asian Currency
33. • Finally, we have reached the end of the line for the US
dollar currency supremacy, and that has to do among
other things with the economic and geopolitical
changes that we have had in the world since 1945.
• The US dollar served its purpose since the end of WW
II and became the major foreign exchange reserve
currency for the system that emerged after the war.
The days of the US dollar playing that special role that
created an international monetary system that revolved
around the US dollar as its main currency has reached
the end of the line, since today that system is very sick
and it is dying a slow death.
34. • The US government and Americans in general lost
sight of the role that the US dollar has been playing in
the world international monetary system since 1945
when the US dollar started becoming an important part
of the foreign exchange reserves of many countries.
When a currency achieves that status of a major
reserve currency the world expects at a minimum
that the currency would be managed in a way to
protect its intrinsic value over time. That is not what
has been happening to the US dollar for a long time.
35. • The value of the 1947 US$ 1.00 has declined
consistently since the US dollar became the major
foreign exchange reserve currency, and in April 2009
that same US$ 1.00 dollar is worth only $ .08 cents;
that is how much of the value of the US dollar has
evaporated because of inflation.
• During the Reagan and Clinton administrations, the
method of calculating rising prices was altered in ways
that lowered the official US inflation rate, and if we
adjust the current value of the 1947 US$ 1.00 to be
consistent with the pre-1983 method of calculating
inflation, then the current value of that same US$ 1.00
dollar would be worth about $ .01 cent.
36. • Since the US dollar became the center of the
international monetary system starting with the
Marshall Plan in 1947 - an unusual place for the
currency of any one country to stay for a long period of
time - the world has changed in drastic ways during all
these decades resulting in a system that is completely
broken today and ready to be replaced by a new
system that represents the new global circumstances
that have evolved since that time.
• (Today over 70 percent of the US dollar currency ever
created is flying around the world outside the circle of
influence of the US Federal Reserve and the US
government.)
37. • Today, the United States is no longer master even of
its own currency, since the accumulation of US
dollars as foreign currency reserves by other countries
around the world has placed the future economic and
financial policy options of the United States in real
jeopardy.
• At the outset of the 21st Century slowly a new
international monetary system is emerging as we
move from a system dominated by one world
superpower and its dominant currency, the US dollar,
to a new world system of 4 or 5 major block of
countries and its currencies - these are the members
of the new world economic order which will include the
North American Union (US dollar),
38. • the European Union (euro), the Asian Union (New
Asian Currency), the Arab Middle East Union (Gulf
Currency), and maybe even some other economic
Union block that we can't see at this time.
• Regarding China and the New Asian Currency (RGE
Monitor - July 2009) It is time for China to show a
sense of leadership and create immediately and
implement a plan for the creation of a New Asian
Currency similar to the euro – and give central bankers
a new major foreign exchange reserve option for them
to be able to diversify their current holdings.
• Source:http://en.wikipedia.org/wiki/User:Amazonas/Ne
w_Asian_currency
39. 5. Recommendation and conclusion
• It is time for China to create immediately and
implement a plan for the creation of a new Asian
currency similar to the euro because of the collabse of
the intrinsic value of Dollar.
• But, similarly it would be a mistake for China to try to
establish the yuan as the new Asian currency to
compete with the US dollar and the euro as one of the
main global reserve currencies.
• A new Asian currency would be a better choice in the
long run not only for China, but also for the other
countries that decide to adopt the new Asian currency
including Japan and Brazil.
40. • An international monetary system based on the US
dollar has had its advantages over the years for the
US, but eventually it has placed the United States in
a situation that the US government is no longer a
master of its own destiny, since a few select
countries are holding a massive amount of US
government debt. A system like that is unsustainable
in the long run and eventually becomes a major
liability, as is the case today of the United States and
its creditors.
41. • Also, Brazil adopt the new Asian currency right from
its inception since that strategy would help integrate
the Brazilian and the Chinese economies in the years
to come.
• Here is why a new Asian currency similar to the euro
is a better choice than the yuan for the new
international monetary system because will provide
macroeconomic stability for brazilians and other
members.
42. • The members of the Executive Board of the European
Central Bank (ECB) are not there to represent their
countries of origin. They are there to provide stability to
the euro and they look at Euroland as a whole when
making their policy. The euro is a monetary
arrangement, and its monetary policy will be adopted
independent from political control from its members.
• such policies also will be good for Brazil. The Brazilian
economy will be better off under the euro system than
under the fragile and weak Brazilian currency.”
43. • That same type of logic also applies today regarding
China. It will be better for China and the other
countries that decide to adopt this new Asian currency;
to create this new Asian currency and have a similar
arrangement as the euro in Euroland
