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Totaling more than $3 trillion, China has the largest stockpile of foreign exchange reserves in the world - everything from U.S. dollars (USD) to euros (EUR) to pounds (GBP). At the core of these assets is the People's Bank of China (PBOC), the single entity responsible for monetary policy and oversight in China.
The PBOC places much of its focus on preventing and resolving financial risks and ensuring financial stability, says Sankar Krishnan, global client engagement head of Banking & Financial Services at Sutherland Global Services, a global provider of banking services that improve efficiency and revenue-to-expense ratios based in New York.
Unlike other central banks that allow their currencies' values to be determined by market forces, such as the U.S. Federal Reserve, the PBOC tries to manage all aspects of its currency, the renminbi (RMB).
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For example, "On one side of the spectrum, the American central bank's mandate is 'employment, inflation and economic growth,' and noticeably absent is anything about the exchange rate," says Ronald Schramm, professor at Columbia Business School of Columbia University and CEO of China MacroFinance, a financial analytics firm specializing in Chinese business, both based in New York. "China also targets these variables but also targets the value of its currency or exchange rate."
Furthermore, "Exports and foreign direct investment are still critical components of the Chinese economy and employment in China - thus the significance of the exchange rate," Schramm says.
The regulatory branch of China's banking system is made up of three different components: the PBOC, the China Banking Regulatory Commission (CBRC) and the State Administration of Foreign Exchange (SAFE), Krishnan says.
Launched in 2008, the CBRC "works under the PBOC and supervises the entire Chinese banking sector," Krishnan says, adding that its members aim to improve the efficiency of China's main domestic banks and assist the PBOC in furthering currency exchange policy.
In June 2009, for the first time in history, the PBOC allowed more than 100 companies in China to settle international trade in what they called "offshore RMB," says Alfred Nader, vice president of corporate strategy and development at Western Union Business Solutions.
Since then, the PBOC has expanded this policy to permit each Chinese business to trade in offshore RMB. However, foreign businesses that are reluctant to send invoices and international payments in yuan, the base unit of the RMB, could be losing money due to extra "padding" added by Chinese exporters.
In fact, 36 percent of 1,000 Chinese businesses surveyed said they prefer to receive international payments in the RMB over the USD in a Western Union Business Solutions 2012 survey. The survey also found that some Chinese businesses attach a 3-percent fee to payments in order to cover currency exchange rate fluctuations, Nader says, adding that international business owners can avoid paying extra by simply sending payments in yuan instead of dollars using a trusted online foreign exchange service.
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