China boasts of being one of the oldest civilizations on the globe having one of the most robust and advanced economy for much of the recorded history. As of 1979, the Chinese economy has witnessed a new era of unparalleled development by implementing major economic reforms. (Morrison, 2013, p. 5). The 2008 financial crisis had less impact on the Chinese economy compared to other major economies across the globe. In fact, the strength and resilience exhibited by this economy prompted other economies to seek financial support from China (Morrison, 2013, p. 6). Majority of the financial experts argued noticed that the aftermath of the 2008 GFC were felt by China in 2009. The economy started exhibiting a general decline in its annual GDP growth rates. These rates increased at the end of 2010 later assuming a general declining slope. This is illustrated below:- The annual rate of GDP growth has declined over the past ten years emanating from the effects of the 2008 global financial crisis. The impacts of GFC have forced the country to depend on its sovereign wealth funds to sustain its economy. However, China has seen limited access to these funds following contractions of various key economic sectors, as well as its financial sectors. The level of exportation has also gone down due to the contraction of these sectors. The overall effect of this is that chinas annual GDP growth rate has gone down raising the concern of economic and financial experts. RMB refers to the peoples currency and has been utilized as Chinese currency for more than 50 years. This currency was initially issued on 1st December, 1948 by the Chinese Communist Partys Peoples Bank of China. In 1980, with the ongoing economic reforms, RMBs exchange value was deteriorated and was more easily traded resulting in a more realistic exchange rate(Lin, 2013, p. 215). A 4th series of RMB was released bearing a magnetic link, a fluorescent ink and a watermark. Between the years 1997 and 2005, the Chinese government fixed the RMB to the US dollar at an estimated 8.3 RMB for every dollar. On 21st July, 2005, the Peoples Bank of China publicly declared that it would remove the fix to the dollar and introduce a flexible mechanism of exchange rates. In line with this public declaration, the RMB was reevaluated to 8.1RMB for every dollar (Lin, 2013, p. 215). This document seeks to establish the relationship that exists between RMB rate and the China economy. In order to fully meet this key objective, the document will:- Review the different finance policies implemented on the Chinese economy over the past years and establish how they impact the interest rates. Analyze the global capital market and establish the impacts imposed by the former on the RMB rates. Analyze Chinas economic growth over the past financial years and determine how this growth has affected the RMB rates over the past few years. There is no financial institution on the globe that has more financial resources compared to the Peoples Bank of China. The PBC is responsible for:- Developing and implementing appropriate monetary policies. To minimize or avoid incidences of financial risks To ensure financial stability. Issuing and administering the circulation of the RNB(Roxburgh, Lund, & Piotrowski, 2011, p. 13). Controlling the interbank lending market; Controlling the foreign currency and gold reserves; Documenting foreign exchange transactions. Sustaining the optimal functioning of payment traffic; initiating and organizing the financial sectors anti-money laundering policy; Estimating the financial statistics and developing research, forecasts and analyses. Engaging in international financial operations on behalf of the Chinese central bank (Gleave, 2013, p. 16). The global capital market is concerned with the buying and selling of equity and debt instruments. China has experienced widening of the investment corridors resulting in increased demand from the local and global perspective. Onshore markets have prompted strong and well-functioning capital markets for the realization of economic growth. Offshore investors have identified Chinas economy as a productive environment to deploy their capital markets. The offshore RMB bond market has developed significantly over the past two decades, motivated by conducive interest rates. Chinas domestic market for bonds now ranks third on the global scale (Gleave, 2013, p. 18). The economic reforms implemented as of 1978 have largely boosted savings and leveraged issuers and investors sophisticated skills on the globe to boost the efficiency of capital markets. China possesses multiple media for international investors to access the onshore market. Multinational companies have found it easy to raise large amounts of money in this market to fund their operations. China used to be largely dependent on the local authorities to meet the financial requirements of its capital markets. As of 2008, the country has responded by fostering the local fixed income markets so as to fulfill the regional infrastructure requirements. China also permits foreign banks to participate in asset backed securities (ABS) (Gleave, 2013, p. 19). As a result, China has adequately participated in the global capital market and has encouraged investment from foreign banks as long as foreign investors. This has enhanced the circulation of capital resources in the Chinese economy resulting in increase in the sum of money. Increase in money circulating in the economy has pushed down the interest rates(Gleave, 2013, p. 19). The pace and scale of Chinas economic reformation has seen no match in historic occasions. In 1978, China was among the poorest nations on the globe. The real per capita Gross Domestic Product in China was one-fortieth that of U.S. level and one-tenth that of the Brazil. Since then, Chinas real per capita Gross Domestic Product has appreciated at a rate of no less than 8% on a yearly basis(Song, 2010, p. 11). In consequence, Chinas real per capita Gross Domestic Product is now approximately one-fifth that of United States and at par with that of Brazil. This boost in average living standards has taken place in a state with no less than 20% of the globes population implying that China is currently the second-largest economy on the planet (Song, 2010, p. 11). The main emphasis is Chinas growth since 1978, when the country commenced economic reform plans. Astonishingly, China has experienced well-documented sky-high rates of savings and investment activities. The sector-level productivity growth and the successful resource reallocation across sectors and firms within a single sector have contributed greatly to total productivity growth. On a general basis, consistent and gradual institutional change and reformation of policies that have minimized distortions and boosted economic motives are the key reasons behind growth in the countrys productivity(Song, 2010, p. 11). The average yearly % GDP per capita growth between the years 2000 and 2011 was at 9.5% while the annual % GDP growth from 2000 to 2011 was at 10.2%.Analysis of the GDP contribution across Chinas economic sectors reveals that the main contributors are the agricultural sector and the services sector. The agricultural sector, since reformation in 1978, has contributed an average of 9.3% of GDP while the services sector has contributed an average of 46.4%. The services sector has been the key contributor on an aggregate scale (Gleave, 2013, p. 18). The period between 2011 and 2015 has witnessed the Chinese government prioritizing the development of services. This sector has implemented an opening-up strategy in key subsectors including logistics, finance, healthcare and education. The economy has also been at the top in terms of transport, tourism and construction. The reformation and development of this sector has resulted in a parallel growth of the Chinese economy. Economic growth is usually accompanied by increase in funds for borrowing and lending. Increase in funds has pushed down the RMB interest rates in the period between 2000 and 2015. On October 23rd, 2015, the Peoples Bank of China cut its basic annual lending rate by 25bps. This set it at 4.35%. Policymakers also sought to lower banks reserve requirements. Chinas interest rates averaged 6.35 percent from the years 1996 to 2015, reaching an all time high of 10.98 % as of June of 1996 and a record low of 4.60% as of August 2015(Gleave, 2013, p. 14). This is depicted in the illustration below:- Chinas finance policies are determined by the Peoples Republic of China (PRC). Since 1970s the PRC has considered letting the RMB float with its price in US dollars determined by the market. This has assisted in reducing trade surplus while lessening the Peoples Bank of Chinas (PBOC) burden in curbing inflation and equilibrating the market for foreign exchange(Elliot, 2013, p. 14). Towards the end of the 1970s and the fixed exchange rates regime, markets anticipated depreciation of the dollar. The impact was a general surge in capital inflows leading to RMB appreciation. This prompted intervention by Chinas central bank resulting in a massive increase in foreign reserves and the supply of money to a level that triggered Wholesale Price Index (WPI) to exceed the US rate. This loss in monetary control emanating from foreign exchange market intervention enhances the occurrence of appreciation and inflation (Gleave, 2013, p. 21). During the fixed exchange rate period of 1994-2004, efforts to curb inflation were successful until external pressure and market anticipations for the RMB to appreciate mounted marking the creeping in of inflation to volatile levels. This indicated a loss in monetary control. The year 2008 witnessed ultra-easy money and quantitative easing policies after the global financial crisis halting the RMB appreciation trend. The government responsive action was raising the reserve requirements. Outflows from the PRC fell slightly. This shift from the fixed rate period to the elimination of this policy has thus caused flux in RMB rates. This flux has emanated from changes in outflows, consequent inflation in the economy and changes in foreign reserves(Gleave, 2013, p. 22). Shifts in both the interest rate and exchange rate significantly affect the domestic economy of a country and its capital market development. This relationship between RMB interest rate fluctuations and a countrys domestic economy can be explained using the traditional theories like the interest rate parity, capital flow theory and the classical theory of IS-LM model. According to research done, there is a very significant correlation between the Chinese economy, particularly based on its foreign exchange market, the money market and the securities market; with RMB appreciation as well as rise in the interest rate, capital market accumulation effect and the securities assets revaluation effect (Xiangqian & Guoqiang, 2005, p.3). This correlation promotes the general price level of the Chinese capital market, which rises. Concurrently, considering the minimal flexibility in the current RMB interest rate and the exchange rate, coupled with the reverse effect between the currency appreciation and the interest rates, it is projected that the impact brought about by the RMB appreciation on the capital market will be insignificant relative to the past situation of the yen appreciation (Wang, 2005, p.748). The expected RMB appreciation is expected to form some hot money flows and cause a Chinese economic bubble. There is need to thus monitor the link between the RMB interest rate fluctuations and the economy of China. The interest and exchange rates are the most significant factors that affect prices in the market economy. The two variables are very essential for the development of a national economy through the capital markets. Interest and exchange rates fluctuations always have an impact on the domestic capital markets through their way and other mechanisms (Jieqiu & Tao, 2004, p.4). Within an open economy, the money and foreign exchange markets of a country are normally integrated. Since they are the main tools of money as well as foreign markets regulation, interest and foreign exchange rates have a very significant relationship between the linked constraints (Frankel, 2006, p.248). As a result of interaction and impact of the two variables in the transmission process, interests as well as the foreign exchange rates have an influence that is complicated and diverse, on the capital market of a given country. Much progress has been made in the study on the link between RMB interest rate fluctuations and the countrys economy. Studies have been done on the link between capital markets and the interest rates, foreign exchange rates and the capital markets, exchange rates and the foreign exchange rates (Burdekin & Siklos, 2008, p.849). Cross-border capital flows can be used to indicate the manner in which interest rates affect the foreign exchange rates. It can also be used to show how the foreign exchange rates affect the prices of stocks in the capital markets. Arbitrage capital relies basically on the price comparison of the risk arbitrage and the expense of time needed to pay (Wang, Hui & Soofi, 2007, p.419). In China, the risk reward of a person who participates in arbitrage is normally made up of two parts. The first part is that of the disparities between the level of domestic interest rates and the international ones. The second part is that of expected shifts in the rate of the RMB. Arbitrage costs entail the credibility of the policy as well as the transaction expenses, which are caused by the foreign exchange and capital regulations. Currently, China has a favorable international trade balance, occasioned by the rising supply of the foreign exchange (Wang, 2004). It has to be considered that the trend in China shows that the RMB may continue to stick to the small appreciation trend. When there is a consistent growth of RMB, the international arbitrage capital always tends to be introduced to the domestic market through different ways. According to the classical IS-LM model, the inflow of hot money to a country makes its money supply to increase within the nations currency market (Xu, 2001, p.267). The same concept can be applied to the case of China. Inflow of hot money will increase money supply in the Chinese currency market. With this increase in the money supply within the domestic economy, the result is a rise in the prices of goods after a very short period. This leads to the increase in the borrowing interest rates by the government in order to control the money market. Considering the theory of capital flows, which is normally linked to international economics, the global capital flow is always determined by the disparity in the rates of interest. The net inflow of capital relates strongly to the domestic interest rates. However, it correlates negatively to the foreign exchange rates. When the domestic rates of interest increase, it is likely to cause more global engagement in the speculative capital (Jin, 2007, p.5). Paying attention to the IRPS common law and decision theory of equilibrium foreign exchange rates, it is true to say that when the domestic interest rates increase within a short period of time, it is likely to raise the demand for the domestic currency in the global financial market. Consequently, the domestic foreign rates of exchange rise leading to the appreciation of the local currency (Bing et al., 2008, p.7). The implication of this statement is that local interest rates have a strong positive relation to the foreign exchange rates. As a result of the relationship that exists between rates of interest and the growth of the RMB, the correlation of the two variables and capital markets is complex. It must be known that the foreign exchange, money and stock markets are related to each other. The capital effect and revaluation that emanates from the dual pressure of the interest rate rise as well as the RMB appreciation will be the combined force that will influence the general price of commodities. It will also drive the general price of securities within the Chinese capital market and enhance its development. The research will apply both qualitative and quantitative research methods in data collection and analysis. Qualitative technique will be used to derive information about the non-quantifiable and non-measurable data of the research. Such data will encompass the facts behind Chinas economic growth, the finance policy and the global capital market. The application of qualitative research and analysis will bear merits to this research and these include:- It eliminates human biases and pre-judgments guaranteeing that the information gathered is both accurate and valid. It offers in-depth insight into the focus of research (Fossey, 2002, p. 721). It enhances cross-case analysis and the drawing of viable conclusions. It responds to changes that occur during the research and may change the foci of researchers activities in consequence. It enhances the conduction of idiographic causation (Dahlberg & McCaig, 2010, p. 115). However, qualitative research bears the following shortcomings:- It takes up much time particularly in data collection analyses activities. It is challenging to make generalizations regarding the focus of the study(Patton & Michael, 2002, p. 5). It is difficult to make systematic comparisons from the facts and figures gathered. Testing of the hypothesis and the theories with large pools of participants is a difficult endeavor. It is difficult to make quantitative predictions(Hancock, Ockleford, & Windridge, 2009, p. 18). Quantitative research methodology will be applied in the collection of measurable and quantifiable data and variables that will assist the research in analyzing the performance of Chinese economy as well as the RMB. Application of this research methodology on the measurable data will bear the following advantages:- It allows the identification of patterns in a given set of data over a given period of time. It gives the impression of certainty. It provides vital illustration of trends in the set of data collected(SuphatSukamolson, 2009, p. 7). This research methodology, just like qualitative research, may bear demerits to this research and these include:- The studies and analysis are expensive and time consuming, and the preliminary results for a long period of time may be inaccessible. The research methods are inflexible during the process of the research because the tools cannot be modified once the study commences(Sibanda, 2009, p. 10). The correlations deduced may hide or ignore the underlying causal agents. Errors in selection of procedures for determining statistical significance can result in findings that are erroneous regarding the impact(Sibanda, 2009, p. 11). The main source of data for the research will comprise of secondary data. This data will be obtained through content analysis. This entails the reviewing of books in a bid to generate responses to the pre-defined research questions. This technique will assist in analyzing the changes in RMB interest rates over the years. In addition, it will assist in the assessment of the Chinese economy over the same period and in determining the relationship between the RMB rates and the Chinese economy(Adler & Clark, 2014, p. 351). Content analysis is advantageous in conducting the research because it is cost efficient since it encompasses the gathering of already published facts and figures. Moreover, the technique provides an extensive scope of the relevant facts and figures that the research can use for reference in order to address its objectives. In addition, this technique offers insights from both history and cultural perspectives over certain durations through the analysis of texts. Finally, this technique is unobtrusive in the sense that it does not interrupt the content as the study and analysis activities proceed (Adler & Clark, 2014, p. 351). This study will not be a straight-forward endeavor. The key limitation is the time allocated for conducting the study. The process of collecting data will be long and cumbersome. Collecting valid, relevant and accurate facts and figures demand adequate amount of time (Johnson, 2013). Successful data analysis also demands adequate duration of time to effectively draw accurate findings and conclusions from the facts and figures with minimization of human error. If and when adequate time is allocated, errors will be easily identified and rectified to guarantee that the findings and conclusions are consistent with the focus of the study (Johnson, 2013). The research will incorporate a series of steps and activities thus will require adequate resources and time. These activities will include the following:- Drafting of the proposal. This will include proposing a research topic, gathering relevant information regarding the topic, highlighting the aims and objectives that need to be fulfilled, proposing the data collection methods relevant to the study and identifying the possible constraints to the effective research conduction. This research activity is involving thus will require for completion. Finalizing and presenting the proposal. This will involve finalizing on the key aspects of the proposal. This is followed by the presentation of the same to the supervisor as a general requirement of the course. This will take 1 week. Approval of the proposal. The supervisor will determine if the research proposal is well drafted and if it adequately meets the expectations of the module. This will take 2 weeks. Feedback from the supervisor. After evaluating the proposal, the supervisor will provide his/her remarks. The feedback is then communicated by the supervisor to the researcher. This activity is not involving thus will take up 1 week for completion. Data collection. This will involve the intensive gathering of facts and figures related to the phenomenon under study. Data collection will largely implement content analysis to obtain relevant facts and figures. This will take two weeks. Data analysis. This will entail the critical dissection of the collected facts and figures with an aim to establish significant trends and relationships in the latter. This will apply various techniques in order to minimize researchers bias as well as errors. This is in a bid to obtain objectivity, accuracy and consequently reliable analyses to ensure the success of the research activity. This will take 2 weeks. Drawing of conclusions. This entails recording findings regarding the trends and patterns evident in the data. Conclusions will thus effectively point and record the patterns and relationships inherent in the phenomenon under study thus enabling the formulation of objective and conclusive statements on the same. This will take 1 week. Reviewing of the study to ensure objectivity, validity and accuracy. This will be a continuous process and will be carried out throughout the research endeavor. This plan of activities is presented by the Gantt chart below:- Research activities Duration in weeks Drafting the proposal Finalizing and presenting Proposal approval Feedback and green light Data collection Data analysis Drawing of conclusions Review of the study Adler, E., & Clark, R. (2014). An Invitation to Social Research: How Its Done. New Jersy: Cengage Learning. Dahlberg, L., & McCaig, C. (2010). Practical Research and Evaluation: A Start-to-Finish Guide for Practitioners. New York: Sage. Gleave, S. (2013). Chinas capital markets. Chinas capital markets, 1-40. Johnson, A. (2013). UN University. Retrieved March 23, 2015, from UN University: http://archive.unu.edu/unupress/unupbooks/80733e/80733E0h.htm Lin, J. Y. (2013). China and the Global Economy. China and the Global Economy, 213-229. Morrison, W. (2013). Chinas Economic Rise: History, Trends, Challenges, and Implications for the United States. Chinas Economic Rise: History, Trends, Challenges, and Implications for the United States, 1-42. Song, L. (2010). Chinas rapid growth and development: An historical and international context. Chinas rapid growth and development: An historical and international context, 1-32. Zhu, X. (2012). Understanding Chinas Growth: Past, Present and Future. Journal of Economic Perspectives, 103-124. Bing, Z., Sixian, F., Xindan, L. and Huijian, W., 2008. Exchange Rates and Stock Prices Interactions in China: An Empirical Studies after 2005 Exchange Rate Reform [J]. Economic Research Journal, 9, p.007. Burdekin, R.C. and Siklos, P.L., 2008. What has driven Chinese monetary policy since 1990? Investigating the Peoples banks policy rule. Journal of International Money and Finance, 27(5), pp.847-859. Frankel, J., 2006. On the yuan: The choice between adjustment under a fixed exchange rate and adjustment under a flexible rate. CESifo Economic Studies, 52(2), pp.246-275. Jieqiu, W. and Tao, X., 2004. Exchange Rate Adjustment and its Impact on Employment in China [J]. Economic Research Journal, 2, p.004. Jin, L.J.L.M.S., 2007. The Effects of RMB Appreciation on Chinas Stock Market [J]. Journal of Financial Research, 6, p.005. Wang, M.T., 2004. China: Sources of real exchange rate fluctuations (No. 4-18). International Monetary Fund. Wang, T., 2005. Sources of real exchange rate fluctuations in China. Journal of Comparative Economics, 33(4), pp.753-771. Wang, Y., Hui, X. and Soofi, A.S., 2007. Estimating renminbi (RMB) equilibrium exchange rate. Journal of Policy Modeling, 29(3), pp.417-429. Xiangqian, L. and Guoqiang, D., 2005. The Influence of Fluctuation of Real RMB Exchange Rate to Chinese Import and Export: 1994??2003. Economic Research Journal, 5, p.003. Xu, Y., 2001. Chinas exchange rate policy. China Economic Review, 11(3), pp.262-277.
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]