Currency Management Under A Hybrid System: Case Of The Yuan
Authors: Lakehal-Ayat Merouane 
Published: February 2016

<p class="MsoNormal" style="text-justify: inter-ideograph; text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">The purpose of this research paper is to analyze the Renminbi (the Chinese currency)</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">, suggesting whether or not the currency should be allowed to float.<span style="mso-spacerun: yes;">&nbsp; </span></span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">The paper makes</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"> the</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> use of four popular approaches to determine whether or not the currency is currently undervalued</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">,</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> and if so, what mechanisms should be used to allow for its proper valuation.<span style="mso-spacerun: yes;">&nbsp; </span>According to the purchasing power parity</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"> (PPP)</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">, balance of payments approach, and the asset management approach, the Chinese currency is undervalued and will therefore appreciate in the future. </span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"><span style="mso-spacerun: yes;">&nbsp;</span>For the long run, the floating of the currency is advisable</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">;</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"> however, in the short run,</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> it will not be in the best interest of the Chinese economy</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;" lang="SR-CYR"> </span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">given the </span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">nature</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> of its banking system</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">.<span style="mso-spacerun: yes;">&nbsp; </span></span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">Adopting a pure float </span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">could possibly cause</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> major macro and micro economic imbalances that would <span style="color: black;">be</span><span style="color: red;"> </span>difficult to tackle. </span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;" lang="SR-CYR"><span style="mso-spacerun: yes;">&nbsp;</span></span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">Instead, suggest</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">ing the</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> pegging of the Renminbi against a basket of currencies to ensure</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"> system wide</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR"> flexibility and stability</span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"> is the best course of action</span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="SR-CYR">.</span></span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;"></span></p>