The value of the Chinese Renminbi (RMB), its management and risks associated with investing in China

Ever since China adopted its Open Door policy, it has received unparalleled attention from international scholars. In recent years, this has been evident with respect to the exchange rate regime that China has applied. At first, the policy was lauded because it helped China steer the dire waters of the Asian Crisis that occurred in the late 1990s. Even after the world entered the new millennium, the exchange rate regime has been heavily criticized. Most of this criticism came from the USA, since they placed China at the top list of who to blame for the worsening trade deficit, especially referring to the undervalued nature of the Renmimbi (RMB). However, this is just a part of what we address in this paper. In the first part, we will explain the current situation in China. We will see how the Chinese exchange rate regime changed from a dollar peg, to a peg based on the existing basket of currencies.

[...] On April for the first time in more than a decade, the dollar bought less than 7 Yuan, ending the day close to a situation that specialists say will probably make Chinese-made goods more expensive for American consumers and possibly contribute to inflation in the United States; indeed the Yuan has gained about 16 percent against the dollar since the peg ended in 2005, including about 4.5 percent this year, and some analysts believe the Yuan will continue to rise, possibly reaching 6.5 Yuan to the dollar by the end of the year, stated Barboza D How could we determine the equilibrium value of the Chinese renminbi under a flexible exchange rate regime? [...]

[...] In the next section we will have a look at some pros and cons of floating the RMB Risks and opportunities commercial participants would face if China decided to freely float the RMB and other risks investors face in China? As trade and investment are significant aspects of the Chinese economy, re- evaluating the currency would present both investors and commercial actors with substantial risks as well as potential benefits. This part presents the options available to commercial actors should China decide to freely float the RMB. [...]

[...] Probably, a one or a two years target should be considered to reach a long term equilibrium rate, minimising the cost for the economy and the risks of a crisis. Now, in order to predict a long-term equilibrium for the exchange rate, we can use theoretical models that will give us a base where the target rate should be. We could use methods which consider prices, or inflations, or importations and exportation and then the balance of payment. We dispose of various methods, respectively, Law of price the covered interest parity or the underlying payment disequilibria (UPD) for example. [...]