Question

Some examples of topics you can discuss: What has happened with China’s Balance of Payments over the past years? How has China's exchange rate policy changed? Have these been good changes for China?

Answer 1

The Balance of Payments for any country is a record of its economic transactions with the rest of the world.Every country's economic relations with the rest of the world are summarised in the Balance of Payments.This is divided into the current account, which records the flows of trade and income, and the capital account .which records the flows of financial assets and liabilities.Usually countries have a deficit on one and a surplus on the other. China has been an exception in having a surplus on both,which explained the very strong growth of foreign reserves.But the capital account surplus has now become a small deficit.This is consistent with the view that the foreign reserves,which has stopped growing,might shrink in future.It is also a signal of capital flight from China.

In 2005 Chinese Central Bank modified the exchange rate system by announcing that "the yuan will be no longer pegged to the US dollar" and that "China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.

Change in China:s exchange rate policy has been a good change for China. As Chinese leaders observe that all countries that have raised themselves from poverty to wealth in the industrial era,without exception,have achieved so through export led growth. Because of this observation they manage the exchange rate to broadly favour exports to achieve the goal of becoming rich and powerful modern country.