1. History
The Chinese government introduced its first exchange rate policy in 1949. From 1949 to 1955, the policy was based on a managed currency floating system. With the establishment of a centrally planned economy, the Chinese government implemented a pegged policy in 1955. After the collapse of Bretton Wood¡¯s system in the early 1970s, China changed its monetary policy to basket currency. The weak economic environment in the country in 1985 resulted in the re-introduction of the managed currency floating system. Between 1985 and 1995, the changes in the Chinese domestic finance and economy led to a rather drastic depreciation of RMB. The Chinese government reverted back to pegging its currency to the US dollar. The peg rate was approximately $8.28 RMB to $1 US in 1995. It was not until 2005 that the Chinese and US currencies were ¡°un-pegged¡±, that is, RMB will be able to reflect based on its fair value.
2. China¡¯s growing economy
Since the economic reforms in......
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