China's Balance of Payments and Exchange-Rate Policy

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1.??China economy:

China's economy is the fastest and most expanding economy. It has a tremendous economic impact on the world. It all started in 1978. Before 1978, the Chinese economy was characterized as "on the brink of disaster," due to issues such as low productivity growth and growth rate was around 6.7% (Zhang, 1996). But?Deng Xiaoping’s new economic reforms helped the Country to get off the planned economy and open to Foreign investment, open to technology. However, It is presently the second-biggest economy on the planet, accounting global GDP of 9.3%.?(Asia link business,2022)

2.??China’s international economy:

The Chinese government Between 1979 and 1990, the country began opening up. The nation grew at a 9% annual growth rate. Around 1990 and 2010, China's annual growth jumped to 10.4 percent. In the world economy, it secures the 10th world’s largest exporter and one of the fastest rising economies. Furthermore, it is drawing significant foreign direct investment—over $11 billion in 1992 alone. China has overtaken the United States as the world's top product exporter, accounting for 9.6% of global exports (Yifu Lin, 2022).

Television and Radio equipment ($231 billion), Personal PC ($146 billion), Company machine parts ($90.8 billion), integrated circuits ($80.1 billion), and Mobile phones ($62 billion) were amongst China's highest valued exports. (Fordham, 2022)

3.??China BPO (Balance of payments)

The "balance of payments" (a summary of a Country’s overseas Income and expenditure) is a primarily economic tool that has evolved in tandem with the advancement of international commercial and economic interactions. It also shows the country’s economic growth.

3.1????????The Balance of Payments had a limited scope from 1949 until the late 1970s:

For 30 years after the establishment of New China, its traffic was international transaction was Very limited. The yearly proportion of China's import and export volume to national revenue was 12.2% between 1953 and 1959, 8.4% in the 1960s, and just 9% between 1970 and 1976. In the 1950s, China's share of global export volume was only 1.37 percent, 1.08 percent in the 1960s, then 0.81 percent between 1970 to 1976. China's export volume was ranked 28th in the globe in 1950, but it had plummeted to 34th by 1976. Because of its overall low level of international economic development. Reasons were

·????????The economic foundation of the country was weak.

·?????????Restricted import and export abilities

·????????Economic decisions were made incorrectly.

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3.2 The Balance of Payments has a greater reach from the late 1970s to the current day.

Since 1970, China's international payments have advanced to a different extreme. Developments in the economic system, have substantially enhanced laborers’ social productivity has resulted in high in China's foreign activities. Tourism, financial activities have all seen major increases in recent times. China's foreign earnings and spending have altered considerably as a result of the increase in international contacts. (Wu Nianlu and Xiaowei, 2022)

The older limited concept of the balance of payments has now been replaced by a larger one. China got accepted as a genuine participant of an IMF and World Bank in 1980. In 2019, global economic growth slowed, nations such as the United States, Europe, as well as other developed countries, but China country's economy remained generally constant and developed. The annual?GDP was RMB 99.1 trillion, up 6.1 percent in similar prices each year, as well as the Consumer Price Index (CPI), was up 2.9 percent, according to preliminary figures (see Fig 1 ). Consumption rose dramatically, investments rose slow but steadily, exports and imports climbed in bulk, and industrial production was increased. (Wu Nianlu and Xiaowei, 2022)

3.3 The BPO ‘s Most Important Characteristics

(A)?????????????The current A/C:

???Current account contains includes transactions concerning the economic value that takes place among resident and non-resident entities (except those in financial items)

? In December 2021, China's current account surplus was 119.4 USD billion, up from 73.6 USD billion a quarter before that.

?? Data on China's current account balance in US dollars is available quarterly from March 1998 to December 2021, with an average value of 40.3 US dollars.

? In December 2021, foreign direct investment (FDI) rose by 82.8 billion dollars, whereas China Direct Investment Abroad expanded by 42.0 billion dollars.

?? The country's FPI climbed 25.3 billion dollars during September 2021, and the Nation’s nominal GDP was 3,847.7 billion dollars in March 2021.

(B)??????????????The capital A/C:

·????????These operations involve materials, service, and financial exports and imports, as well as transfer payments such as foreign aid and remittances. (Capital Account Definition, 2022)

·????????In September of 2021, China's capital account was estimated at 107.427 USD. This is an improvement from June 2021's figure of 27.001 USD million.

·?????????Capital Account data is updated quarterly from March 1998 to September 2021, with 95 observations aggregating 12.720 USD mn.

·?????????The statistics peaked in March 2013 at 1.570 billion dollars and peaked in June 2014 at 601.025 billion dollars.

(C)???????????????The Financial A/C :

·?????????A tool for tracking changes in international asset ownership is the financial accounts.

·????????Citizens, businesses, the government, or the banking system will be the owners

·????????Direct investments, securities such as stocks and bonds, and commodities such as gold and hard cash are all types of assets.

·????????Financial accounts (excluding foreign exchange reserves) recorded a surplus of RMB407 billion in the second quarter of 2021, whereas foreign exchange reserves improved by RMB322.4 billion.

·????????When it comes to SDR (Special drawing line), Reserve assets were raised by SDR 34.8 billion in the second quarter of 2021, while financial account (assets of reserve excluding) recorded an SDR 44.1 billion surplus.

·????????According to SDR terms, the financial account (assets of reserve excluding) had a surplus of SDR 20.1 billion during the first half of 2021, while reserve assets rose by SDR 59.2 billion.

4.China in exchange rate policy:

China's currency rate strategy drew a huge amount of attention due to Asian financial crisis in 1997. The yuan–dollar exchange rate has been steady at 8.30 since 1994. Is it a smart monetary policy? Does China start making the rate of exchange more flexible, possibly allowing the yuan to decline, in order to deal with the fallout from the Asian financial crisis?

?Majority of attention in an argument about the need for the yuan to fall has been centered on China's slowing export. As a result, a yuan devaluation is required to make Chinese exports more competitive. (Xu 2000) believes that the rate of exchange is more useful as a strategic instrument in China than as a tool for switching expenditures. Stability in the exchange rate provides a solid basis for native pricing stability and long economic success.

Trade flows have been low flexible to changes in exchange rates as the economy of China has become increasingly joining global markets and domestic prices have become more closely tied to global prices. As a result, maintaining exchange rate stability is a rational strategy as long as short-term speculative capital flows are restrained. (Summers & Heston, 1991), which is a weighted average of the official and parallel rates

4.1 Background Information about China's Monetary Policy:

Prior to 1994, China had a double exchange rate system. There was an official fixed exchange rate system where the government was using. While entry to foreign exchange was heavily limited this exchange rate system has been used by importers and exporters in "swap markets". The two exchange rates appeared radically different. In 1993, the official exchange rate with the dollar was 5.77 yuan, contrasting to 8.70 yuan on the swap markets. The United States has condemned China's double exchange rate regime. (M. Morrison and Labonte, 2011)

The Chinese government combined the dual currency rate systems in 1994 at an initial rate of 8.70 yuan to the dollar, which was later permitted to climb to 8.28. By 1997 and then remained reasonably stable until July 2005 (M. Morrison and Labonte, 2011)

4.2 2005: China Reforms the Peg

The government of China revised its monetary system on July 21, 2005??decided that the RMB's exchange rate will be flexible, based on market supply and demand. Changes adding that the US dollar's exchange rate against the RMB was modified from 8.28 to 8.11 yuan, a 2.1 percent increase. The dollar-RMB exchange rate increased by 18.7% from July 21, 2005 to July 21, 2008, China's currency appreciation policy came to an end in mid-July 2008 (see Figure 1), owing to decreasing worldwide demand for Chinese goods as a result of the global financial crisis. The RMB fell somewhat against the dollar in July-August 2008 and December 2008, but remained stable at 6.83 yuan until roughly mid-June 2010. (M. Morrison and Labonte, 2011)

5. Conclusion:

China has one of the finest and fittest rapidly growing economies in the world. As summarised above China’s international economy is impressive due to lots of exports which directly help to improve the country’s economy, human productivity, and international relations.

Coming to China’s balance of payments before it was very much limited but after that, it was replaced and opened up to FDI and gradually got surplus and it will be surplus because at the covid time China’s economy was stable.

The exchange rate policy got more important and slowly it got improved and now in the international economy or global market, China stands top.

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?6. References:

·????????Asia link business. 2022. [online] Available from: <https://asialinkbusiness.com.au/china/getting-started-in-china/chinas-economy?doNothing=1> [Accessed 05 March 2022].???

·????????Ceicdata com. 2022.?China Current Account Balance, 1998 – 2022 | CEIC Data. [online] Available from: <https://www.ceicdata.com/en/indicator/china/current-account-balance#:~:text=China%20Current%20Account%20recorded%20a,value%20of%2040.3%20USD%20bn.> [Accessed?14 March 2022].

·????????Ceicdata.com. 2022.?China BoP: Capital Account | Economic Indicators | CEIC. [online] Available from: <https://www.ceicdata.com/en/china/balance-of-payments-bpm6-quarterly/bop-capital-account#:~:text=China%20BoP%3A%20Capital%20Account%20data,Sep%202021%2C%20with%2095%20observations.> [Accessed 14 March 2022].

·????????Fordham, E., 2022.?What are China's major imports and exports?. [online] Fox Business. Available from: <https://www.foxbusiness.com/money/china-trade-exports-to-us-imports> [Accessed 08 March 2022].

·????????Investopedia. 2022.?Capital Account Definition. [online] Available from: <https://www.investopedia.com/terms/c/capitalaccount.asp#:~:text=The%20capital%20account%2C%20on%20a,or%20net%20exporter%20of%20capital.> [Accessed 14 March 2022].

·????????M. Morrison, W. and Labonte, M., 2011.?China’s Currency: An Analysis of the Economic Issues. [eBook] Available from: <https://sgp.fas.org/crs/row/RS21625.pdf> [Accessed 19 March 2022].

·????????Safe.gov.cn. 2022.?SAFE Releases China's Balance of Payments for the Second Quarter and the First Half of 2021_Data Interpretation_State Administration of Foreign Exchange. [online] Available from: <https://www.safe.gov.cn/en/2021/0930/1871.html#:~:text=In%20the%20second%20quarter%20of,rose%20by%20RMB%20322.4%20billion.> [Accessed 14 March 2022].

·????????Wu Nianlu, M. and Xiaowei, M., 2022.?MANAGING CHINA'S BALANCE OF PAYMENTS. [ebook] Available from: <https://www.uvic.ca/research/centres/capi/assets/docs/NianluXiaowei_Managing_China.pdf> [Accessed 19 March 2022].

·????????XU, Y., 2000. China's exchange rate policy.?China Economic Review, 11(3), pp. 262-277. [online]. Available from:?https://doi.org/10.1016/S1043-951X(00)00021-3Get?rights and content [Accessed 13 March 2022].

·????????Yifu Lin, J., 2022.?China and the Global Economy. [ebook] Available from: <https://www.frbsf.org/economic-research/files/Lin.pdf> [Accessed 08 March 2022].

·????????Zhang, A., 1996.?Economic Growth and Human Development in China. Human Development Occasional Papers.