Question

Mr Yi said the Chinese exchange rate system as managed floating exchange-rate system and it is working well. Briefly discuss the importance of a managed exchange rate system to the performance of an economy. You may use Chinese economy as an example.

Answer 1

Managed floating exchange rate system refers to the exchange rate which is not determined by market forces. market forces only partially determines such exchange rate.

Central Bank of country manages such exchange rate from time to time. Central bank intervens in exchange rate system by buying and selling foreign exchange. system of managed floating exchange rate helps country to protect itself from external shocks. Sudden rise and fall in exchange rate may damage economy. Hence, in developing countries, managed floating rate is beneficial.

China is using managed floating exchange rate. Through the technique of managed floating exchange rate, China is keeping its currency undervalued.

If currency appreciates, then central bank of country starts buying foreign exchange from open market. On other hand, if currency depreciates, then central bank starts selling currency in open marke thereby keeps tab on depreciation.