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Part 1: Understanding China's Currency Policies

With a population of more than 1.3 billion and its import and export businesses totaling $1.817 trillion and $2.05 trillion,[1] respectively, China presents a host of opportunities for small firms that plan to expand international trade.

But before a business owner decides to make inroads into the Chinese market, he or she must become well versed in dealing with the renminbi (RMB), the official currency of China, as well as with the monetary policy set by the People's Bank of China (PBOC).

Key Issues

In the past, one issue that had been difficult to navigate for some businesses was the Chinese government's limitations on companies settling trade in the RMB.

“China has a huge surplus, which means they were exporting a lot more than they were importing. Yet, despite that, their currency had not appreciated much.”

— Dr. Fariborz Ghadar, William A. Schreyer Professor of Global Management, Policies and Planning, and director of the Center for Global Business Studies at Penn State

Unlike other major currencies, like the U.S. dollar (USD), the RMB could not be openly traded in the foreign exchange market until 2008, when rules were liberalized to allow for the direct receipt of RMB from foreign payors for trade-related payments, says Alfred Nader, vice president of corporate strategy and development at Western Union Business Solutions.

Now, in many cases international businesses can benefit by settling their payments to Chinese companies in RMB. "Negotiate invoices in the RMB in order to get a better pricing," Nader says. "See what the price is in the USD. Negotiate. Then say that you prefer to pay in the RMB and negotiate further."

Business owners can also benefit from the services of a trusted online foreign exchange provider that offers helpful tools such as a free online currency converter and 24/7 customer service to simplify currency exchange. Plus, it's possible to send convenient bank-to-bank international payments on the go via one's laptop, tablet or smartphone, helping business owners avoid lines or limiting bank hours.

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Another important aspect of China's monetary policy was the government's control over the value of the RMB. While most currency values, like the USD and the pound (GBP), are "floating," or determined by the powers of supply and demand, the value of the RMB was pegged, or linked, to the USD until July 2005.[2]

For China, currency pegging was a way "to avoid any type of extreme volatility in their currency that would affect their economy," Nader says. "Today, the Chinese government allows its currency to fluctuate up or down by 1 percent against the dollar." 

But the discrepancy between China's substantial international trade surplus and the unappreciated value of the Chinese currency caused many of its trading partners, including the U.S., to perceive an unfair market advantage. "Typically, if you have a substantial trade account surplus, your currency gets stronger," says Dr. Fariborz Ghadar, William A. Schreyer Professor of Global Management, Policies and Planning, and director of the Center for Global Business Studies at Penn State in University Park, Penn. "China has a huge surplus, which means they were exporting a lot more than they were importing. Yet, despite that, their currency had not appreciated much."

To learn about the transformation of China's currency policy, read {{WZ0lGEniiUOOw3VVGb4oNA:Part 2: Understanding China's Currency Policies}}.


[1] "The World Factbook," Jan. 29, 2013, Central Intelligence Agency (CIA)

[2] "The World Factbook," Jan. 29, 2013, Central Intelligence Agency (CIA)



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