USD by comparing before Asia financial crises. Therefore, China's central bank reduced the reserve rate from 13% to 8% in March of 1998 and 8% to 6% in 1999, in order to release the pressure of national expenditure. The GDP growth rate reduced about 2-3% by comparing before 1997 (see figure 2) (Xia & Chen, 2005).
Figure 2 China GDP Growth Rate 1997-2010
Source: TradingEconmics.com; National Bureau of Statistics
In 2002 to present, is the third stage of China's foreign stage reform, 'boost development stage'. In 2003, China's GDP growth rate reached 9.1%, in 2004 and 2005, China maintained 10.1% and 9.9% growth rate in GDP (see figure 2). However, this circumstance enlarged the appreciation pressure on RMB.
On 21 July 2005, China gave up the fixed exchange rate that it had adopted and grown into over a decade. China's exchange rate had been effectively fixed at 8.28 yuan per USD within a slight range of 0.3 percent plus or minus with no control on the RMB's value against other currencies (Ronald, 2005). At the same time, The People Bank of China launched the new exchange rate policy; the new policy depends on market supply and demand to foreign currencies, adjusts by referencing to a basket of currencies and follows the published exchange rate fluctuation in international markets. The Chinese government stated that the China's monetary management team will keep tuning the RMB exchange rate at a reasonable and balanced level (Huang, 2006). Since then, China's balance of payments and trade has undergone several different stages, from high-inflation period to high-deflation period.
3.中国的汇率风险-3. The Currency Risk in China
Chinese companies face additional risks in operating with foreign companies in international circumstance. One of main risks is the currency risk, which appears from changes of exchange rates between different currencies. One simple method is to measure the return in domestic currency conditions and compare it with the returns in local currency conditions, and characterise the 'Currency effect'. However, curry surprise is an essential method to calculate currency risk, which defines as the unforeseen adjustment of the foreign currency relative to its forward rate or market expect rate (Srinivasan& Steve 2003).
Exchange rate instability can work against an international firm, for example, if a payment in a foreign currency has to be completed at a future date, it cannot be guaranteed that the price in the foreign exchange market will be stable in the future. It is possible that the exchange rate will move against the company, leading the company to suffer loss. On the other hand, the foreign exchange market can also provide advantages, reducing the payment cost in terms of their home currency. Generally, when the home currency is devalued, the companies can get advantages in exporting goods to other countries because their products become cheaper. In the same way, Firms get benefit in importing from other countries when their currency becomes stronger, it then increases the currency's purchasing power in other countries.
Therefore, foreign exchange risk can be a significant issue for Chinese enterprises, it can cause risk in potential corporate profitability, net cash flows, and market value. Thus it influences management decisions of multinational corporations.
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