It is more important to recognize that the Chinese government should avoid repeating the mistakes brought about by the appreciation of the Yen.
Over all, the RMB exchange rate reform for more than three years was successful. First of all, the renminbi exchange rate flexibility is constantly enhanced by releasing the pressure of RMB appreciation and second, the operation of the exchange rate reform is under control. The exchange rate reform of RMB appreciation through China's influence is a theory transformed into reality. Meanwhile, the main economic sectors are influenced by the appreciation of the renminbi or the RMB exchange rate reform.
It was in July 2005 that China announced a move that would have major implications on the global economy: it was revaluing the Yuan. Since then, economists, analysts and businessmen have wondered how much impact the Yuan revaluation would cause. Would it cure the seemingly infectious diseases of the global market or would it finally give the world economy a slow and painful death
For a long time now, China's effect on the world market has been undeniably noticeable. The big nation's influence has surpassed the prejudice of only producing cheap goods and labor. Now, it has a say to the price of capital, services, goods and other assets.
Moreover, it has not only brought effects upon the global stage but also on the smaller scale economies of other countries. For example, it has contributed to America's debit by putting out great amounts of export products. For most critics, the global monetary policy has been controlled by the Chinese and not the Americans.
It was in 2004 that the price of oil doubled, the difference only being is that inflation rates did not spike up and cause a big demise in the economy, allegedly because of China's doing. This was because China caused the oil prices to jump after their previous demand for it. However, job pays and inflation remained low after countries got scared of the competition that the "sleeping giant" brought upon them.
Also, the famous ability of the said country to produce cheaply kept world prices and wage rates at certain minimum. Since China was a factor in reducing inflation, major banks were able to keep interest rates lower than they usually should have been. Also, with the presence of low interest rates, most borrowers were encouraged to get loans which were bigger than the usual.
Such occurrences led into a great investments flowing into assets, specifically to realty. Back then, American bond yields were low even if economic growth was steadily increasing and government borrowing was also done in big amounts. These were all brought about by China's actions of buying great quantities of American treasury bonds in order to hold down the Yuan. China's central bank also supported the US mortgage businesses by buying out its securities.
Now that the United States has started to recess, the growth of the market has no choice but to rely on the powerful China.
This isn't going to be as easy it looks though.
With this great of a challenge facing their beloved economy pace-dictating country, Chinese power players must think of ways to handle the social, economic and political consequences. And now that China is causing inflation