Foreign Monetary System Essay example
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Foreign Monetary System – China Name University Foreign Monetary System – China China during the last decade or so has seen a huge influx of capital investments, both foreign and local. Through establishing closer ties with the rest of East Asia, China has been focusing on the “East Asian Monetary Integration”…

Introduction

There were also huge direct foreign investments in China during the 1990s (Zi et al, 2009). With the increased trade amongst the East Asian countries and huge direct foreign investments from countries like USA, it presented a great future ahead for China. However this was not the case, as it created “cyclic overheating”. After the revised Bretton Woods System, China’s exchange rate was pegged to the US dollar and creating an artificially low rate. These countries benefitted from this as China attracted foreign investment in their country with huge profit initiatives due to cheap labor and the finished products were exported to US. In retrospect, China used its export earnings and invested it in T-bonds in US, bringing down their interest rates, thus increasing investments in their own country. However, this made China totally dependent on the foreign investments and had no control over its money supply. This lead to the revaluation of the Chinese Renminbi (RMB) in 2005 which meant the currency was no longer pegged with US dollar but was market determined by a basket of currencies. This managed floating exchange rate system was the important change in the Monetary System of China. ...
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