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Q2 Medium-term Arrangements - Coggle Diagram
Q2 Medium-term Arrangements
Question 1
a) question 1 chaper 4 the appropriate transitional arrangements
Gradual Appreciation, No Major or Medium Jump in Exchange Rate and No Widening of Band
Dont wider the band
because RMB was already thought to be undervalued
widening the band would cause RMB to imidiately appriciate to the upper bound of the band
more speculative inflows
if speculative inlflows do happen the PBoC sterilizes. them
Issuing government bonds:
1 more item...
Raising the reserve requirement ratio for banks:
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Gradual apprecietion
avoid speculation
after a couple of year 2-3 percent is possible
A Basket of Currencies with Special Care to the Exchange Rate Against the US Dollar at the Early Stage
in the first part of the reform it was important to stay at the USD to avoid speculation but now important to move
avoid nominal swings
PBoCs fuck up
first year low appriciation rate 1.29% good
then probably because of lack of understanding of the design of the reform and the pressure from the US the PBoC allowed 3-5% appriciation from late 2006 to late 2007 (up to 10% by 2008!)
speculators, exporters and forign direct investors befited
market expectation was that RMB would appriciate at this higher rate
this caused the stock and property market bubbles
The government
started investing in US planes
outweight the inflows and monetary pressure in RMB
make investment to establish itself as a global superpower
(b) the medium-term arrange- ments
Fixed system is not good for china
intead take example of
the monitoring band system in Singapore
but there are significant differences between singapore and china
because china have had the fixed system for a long time RMB - unlike the Singapore dillar - was believed to be undervalued
switching to the singaporian system would exoiose the economy to speculators
RMB could even overappriciate and cause an economic crisis in the long run
Appropriate transitional arrangements could sometimes be more important than long-term arrangements.
1 more item...
floating exchange rate system with occasional interventions similar to,
but more frequent than that of the US system
Safe and Reversible Roadmap of Reform
Step 1:
Implement the transitional arrangement discussed in Section 2.1. If everything works well for some years, proceed to Step 2. In case of unexpected adverse developments, stay unchanged or go back to the fixed exchange rate system;
Step 2:
Gradually widen the exchange rate band to achieve an exchange rate band system similar to that in Singapore.9 If everything works well for some years, consider the advantages and disadvantages of proceeding to Step 3. In case of unexpected adverse developments, stay unchanged with the new arrangement or go back to the system in Step 1;
Step 3:
Gradually widen the exchange rate band in Step 2 towards infin- ity and proceed towards a floating system with more occasional interventions than that in the US. If everything works well, stay
the supplementary package of policies that could increase the chance of a successful reform as well as China’s immunity and resilience against financial crises in the future
Medium-Term Recommendations
The Doctrine of impossible trinity
a) Mobility of capital
b) stable exchange rate
Example countries
Hong Kong:
Free Capital Mobility: Yes
Stable Exchange Rate: Yes
Independent Monetary Policy: No
Singapore:
Free Capital Mobility: Yes
Stable Exchange Rate: Yes
Independent Monetary Policy: No
United States:
Independent Monetary Policy: Yes
Free Capital Mobility: Yes
Stable Exchange Rate: No
Cina Should
Independent monetary policy: YES
Stable Exchange Rate: YES
otherwise RMB would appriciate too much leading to recesssion and instability of china
Capital mobility: NO
but needs to first get rid of the moral hazard actuvities and non-perforeming bank loans
c) Independence of monetary policy