China's Challenge on the Yuan: the Impact of a More Flexible Exchange Rate Regime in the People's Republic of China on Its Development Strategy and Financial Markets

The introduction of the renminbi to the People¿s Republic of China in 1949 led to much domestic market distortion. It was only in the beginnings of the 1980s when finally the economy witnessed a spectacular progress. This advancement introduced the ever-growing presence of China¿s products to the international marketplace and the development of the Chinese domestic market. Since these first steps to the international scene criticism has not been kept short on its monetary policy. The common argument was, and still is, that by keeping the renminbi undervalued and ensuring the competitiveness of Chinese exports, the main trading partners suffer from negative implications on their Balance of Payments. By July 2005, the Chinese authorities made the first significant move towards a more flexible exchange rate regime with the introduction of a basket peg. Nevertheless, this move has not substantially changed the public opinion. Taking the Chinese domestic market and its international importance into account, the author evaluates the far reaching influences of a potential change in the Chinese exchange rate regime.