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Part 2: Understanding China’s Currency Policies

On July 21, 2005, in the midst of mounting international pressure, China took steps to initiate monetary policy reform - starting with the value of the renminbi (RMB), the official Chinese currency.[1]

After allowing it to be pegged to the U.S. dollar (USD) for decades, the Chinese government removed the peg on the RMB. Instead, the government attached its value to "the basket of currencies," a selected group of foreign currencies - including the yen (JPY), USD and euro (EUR) - whose weighted value functions as a benchmark for currency movement, says Alfred Nader, vice president of corporate strategy & development, Western Union Business Solutions.

Between July 2005 and July 2008, the RMB appreciated by 21 percent against the dollar, from a value of $.1208 USD to $.1464 USD.[2] Then finally, in 2012, the government allowed the RMB to fluctuate by 1 percent daily, Nader says.

“That’s what the Chinese do. They start off small, kicking the ball around to see if something is going to work, and then they expand slowly.”

— Alfred Nader, vice president of Corporate Strategy & Development, Western Union Business Solutions

And the reforms didn't stop there. In 2008, at a time when China was the second largest world exporter over the European Union (EU), it took steps to make the RMB a freely traded currency. The People's Bank of China (PBOC) announced that it was experimenting with creating a market for "offshore renminbi," a denomination of the RMB that could be used to settle trade, Nader says.

The first steps of the expansion were taken in June 2009, when the PBOC selected a handful of companies from a few provinces to send and receive cross-border payments in offshore RMB. These businesses were labeled mainland designated enterprises (MDEs), Nader says.

By the end of 2012, the PBOC had expanded the market to encompass all of China, meaning that Chinese companies could now bill their international business clients in their own currency and, in turn, pay for imports in their own currency. "That's what the Chinese do," Nader says. "They start off small, kicking the ball around to see if something is going to work, and then they expand slowly."

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Future Implications

As the Chinese market grows in the global economy, small international businesses in many different nations have started to see the potential for the Chinese consumer as a viable market for international trade - and the RMB as a major trade currency. In fact, Nader suggests this phenomenon is comparable to the way the USD and the American consumer were perceived at the end of World War II.

"Before World War II, the major trade currency was actually the pound," he says. "But afterward, when the U.S. emerged as a world superpower, the U.S. dollar started to gain traction, and the entire world realized that the U.S. consumer was going to be an important market."

This prompted many foreign businesses to bill their goods and services in USD to make it easier for Americans to purchase from them. And, according to Nader, history is repeating itself. "We're seeing almost the exact same thing happening in China with the RMB," he says.

To that end, Nader suggests that businesses intent on expanding into the Chinese market might consider receiving payments in renminbi as opposed to USD, to attract Chinese customers and mitigate risk when dealing in the foreign exchange market. By using a trusted online foreign exchange provider, business owners can secure the latest currency exchange rate with the RMB, and send and receive payments with greater ease.

[1] "China's Currency Policy: An Analysis of the Economic Issues," Dec. 19, 2011, Congressional Research Service

[2] "Appreciate This: Chinese Currency Rise Will Have a Negligible Effect on the Trade Deficit," March 24, 2010, The Cato Institute

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