China, float or not
Since July 21, 2005, China has adopted a managed floating rate regime based on market supply and demand with reference to a basket of undisclosed currency. The daily trading price of the U.S. dollar against RMB in the foreign exchange market will be allowed to float within a band of +/->0.3% around the central parity published by People’s Bank of China. The signal was initially interpreted by the international market as an indication that China would embark on a gradual shift toward increased flexibility which eventually adopt a floating exchange rate regime where the RMB will appreciate much against US dollar. However, they soon …show more content…
3. What would be the impact for China and the U.S. of a drastic reduction in the U.S. trade balance deficit?
If there would be a drastic reduction in the US trade balance deficit, it suggests that US is growing its exports or reducing its imports drastically, either way this will lead to a balance of payments which are greater than zero, and this will put an upward pressure on the USD for appreciation as there will be an increased demand for USD. Under the flexile exchange rate regime, if the USD appreciates against RMB, China would be able to