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Foreign Exchange Market of China
The foreign exchange market is a financial market for trading currencies. The market is decentralized and there are financial centers around the world that operate as places of trade, where different types of buyers and sellers can trade the currencies. Ultimately, these trades directly influence how each currency is valued relative to the world market. The foreign exchange market involves international trade and investment which in turn enables the currency conversion. The foreign exchange market is the factor that allows for trade to happen between countries that do not have the same currency, like China and the United States. When the currency is being traded, it ultimately determines the value of the dollar and of the yuan.
The spot exchange rate is the exchange rate where differing parties "agree to trade two currencies at the present moment" with the value of the currency "usually at or close to the current market rate because of the transactions (Farlex, 2011). The spot exchange rate is the rate that different countries would use to trade goods. For instance, China is the United States's biggest foreign investor- with $1.149 trillion dollars of holdings in the U.S. economy as of April 2011 (Wan, 2011).When China was investing in the United States, with the volatile nature of the markets in general, it is important that a spot exchange rate is established before the investment occurs so that one party can commit to a set amount of cash. "Because spot exchange rates and average rates different, says Martin Brookes of Goldman Sachs, another American investment bank, spot rates would jump to the average...the great the gap, the bigger the currency-market upheaval," asserts an article in The Economist (Begg, 1997). Spot exchange rates have the ability to greatly influence the currency-market, in...
If the spot exchange rate is poor for one country, then it has a negative impact on the overall value.
The forward exchange rate is "the exchange rate set today for a foreign currency transaction with payment or delivery at some future date" (Investor Words, 2011). The forward exchange rate essentially guarantees an exchange rate of currency, despite the result of future conditions that may change the future exchange rate in the future. A changing exchange rate could mean that one of the countries involved in the exchange would be hurt in that they may have to make more of a product if the currency of the country they are trading with has a currency that is valued for more or vice versa, leaving both parties involved in a situation that they had not planned for. To that end, it definitely allows for a certain insurance of sorts against risk. For instance, Business Weekis reporting that "Pioneer Investment Management Ltd. And Western Asset Management Co. are increasing bets on the yuan appreciating the analysts forecast the currency will gain at triple the rate reflected in prices of forwards contract" (Yong and Teso, 2010). Ultimately, for the countries that essentially "locked in" to a price with China with a forward exchange rate will be getting the sweet end of the deal. With the value of the yuan growing, it would mean that their trading partner would either have to pay more for the good or service, essentially investing more for the same thing. These locked in forward exchange rates prevent countries from finding themselves in situations where they were not prepared for, as economies can break apart or build itself up rather quickly leading to a particular volatile currency value.
The exchange rate theories can be classified into…
Bibliography
Begg, D. (1997, May 8). Europe's single currency: The best way to fit it together. The Economist, Retrieved from http://www.economist.com/node/149135
Farlex. (2011). Spot exchange rate . Retrieved from http://financial dictionary.thefreedictionary.com/Spot Exchange Rate
InvestorWords. (2011). Forward exchange rate. Retrieved from http://www.investorwords.com/2065/forward_exchange_rate.html
Kanamori, T., & Zhao, Z. (2006). Existing theories of exchange rate determination. Retrieved from http://www.adbi.org/book/2006/05/16/1819.renminbi.exchange.rate/existing.theories.of.exchange.rate.determination/
Wan, A. (2011, July 29). China should buy u.s. equities instead of treasuries, economist xie says. Retrieved from http://www.bloomberg.com/news/2011-07-29/china-should-favor-u-s-stocks-over-treasuries-as-default-looms-xie-says.html
Yong, D., & Teso, Y. (2010, November 26). Yuan forecasts at triple forward rates draw funds: China credit. Retrieved from http://www.businessweek.com/news/2010-11-26/yuan-forecasts-at-triple-forward-rates-draw-funds-china-credit.html
Globalization is juxtaposed with this; nations are integrated on the level of economic prosperity. Nevertheless, Mills points out that many Christian principles prevail in the globalization paradigm: fair trade, the accountability of the government, the interdependence of nations and the upliftment of the poor are some of the issues mentioned in this regard. According to the author, globalization is therefore a phenomenon that can be very beneficial from a Christian
Foreign Exchange Rates One of the major complaints companies and individuals have with foreign exchange rates and flexible exchange rates is that they are too volatile because they float. Several factors contribute to the volatility of the rate of exchange. These include the balance of trade, currency substitution, the differential speed of adjustment of asset markets vs. goods markets, and the news. The balance of trade affects the exchange rate because
(Hill, 2008, pg. 371) Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might the global implications of this be? If the there is outside pressure from Western governments and Chinese trading partners. Where, they will begin to impose tariffs and duties in an effort to force the Chinese to change their policy. This would destabilize the Chinese economy, resulting in a collapse
China's massive growth over the last two decades has brought with it a similarly explosive need for energy resources, a need that as of yet cannot be fulfilled by domestic reserves. Thus, China imported 3.5 million barrels of oil per day in 2006, and that number is expected to increase to 13.1 million barrels per day by 2030 (Hanson 2008). Subsequently, "as the world's second-largest consumer of oil, and with
Bibliography 2006 report to Congress on China's WTO compliance (2006, December 11). United States Trade Representative. Retrieved at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2006/asset_upload_file688_10223.pdf brief chronology of China's intellectual property protection. Retrieved at http://www.american.edu/TED/hpages/ipr/cheng.htm Balfour, F.(2008, March 18). World sneezes, China's just fine. BusinessWeek. Retrieved at http://www.businessweek.com/globalbiz/content/mar2008/gb20080318_747713.htm?chan=globalbiz_asia+index+page_asia+investing China. The World Fact Book. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html#Econ Economic reform in the People's Republic of China. Wikipedia. Retrieved at http://en.wikipedia.org/wiki/Chinese_economic_reform Gupta, a.K. (2008) the quest for global dominance. p. 239..Jossey-Bass. ISBN978-0-470-19440-9 Navarro, P. And
country can interfere in the foreign exchange markets. In many cases, the motivation for doing so lies with propping up exporters, by lowering the value of the domestic currency. While this is the most common reason for currency manipulation, it is not the only one. In some cases, currency manipulation aids in the cause of making debt disappear, lowering the value of that debt in order that it might