Currency Management Under A Hybrid System: Case Of The Yuan

Abstract

The purpose of this research paper is to analyze the Renminbi (the Chinese currency), suggesting whether or not the currency should be allowed to float.  The paper makes the use of four popular approaches to determine whether or not the currency is currently undervalued, and if so, what mechanisms should be used to allow for its proper valuation.  According to the purchasing power parity (PPP), balance of payments approach, and the asset management approach, the Chinese currency is undervalued and will therefore appreciate in the future.  For the long run, the floating of the currency is advisable; however, in the short run, it will not be in the best interest of the Chinese economy given the nature of its banking system.  Adopting a pure float could possibly cause major macro and micro economic imbalances that would be difficult to tackle.  Instead, suggesting the pegging of the Renminbi against a basket of currencies to ensure system wide flexibility and stability is the best course of action.