International economics project
Lecturer: Assoc. Prof. Ph.D Nguyen Thuong Lang
NATIONAL ECONOMICS UNIVERSITY
SCHOOL OF ADVANfCED EDUCATION PROGRAMS
SCHOOL OF TRADE AND INTERNATIONAL ECONOMICS
-----------------------------------
MAJOR RESEARCH PAPER ON
INTERNATIONAL ECONOMICS
Topic: Foreign Exchange Policy of China in the period 2015-2023 and implication to Vietnam
Name: Nguyen Tuan Dat
Student ID: 11200756
Major: International Ecnonomics
Class: International Economics 62A
Program: Advanced Educational Programs
Lecturer: Assoc. Prof. Ph. D Nguyen Thuong Lang
Email: langnt@neu.edu.vn, langnguyen3300@gmail.com
Semester: II 2022-2023
Hanoi, 2023
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International economics project
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OUTLINE
List of abbreviations
4
List of tables
4
List of figures
5
Introduction
6
Chapter 1: Exchange rate policy and economic and trade relations between China and Vietnam
since 1991
10
1.1. Exchange rate policy
10
1.1.1. Definition
10
1.1.3. Exchange rate policy instruments
11
1.2. Economic and trade relations between China and Vietnam since 1991
Chapter 2: China's exchange rate policy from 2015-2023
2.1. Overview of China's exchange rate policy before 2015
11
13
13
2.1.1. Overview of China's exchange rate policy from 1949 to 1977
13
2.1.2. Overview of China's exchange rate policy from 1949 to 1977
13
2.1.3. Overview of China's exchange rate policy from 2005 to 2014
14
2.2. Analysis of China's exchange rate policy from 2015-2023
15
2.2.1. Analysis of China's exchange rate policy from 2015 to 2017
15
2.2.2. Analysis of China's exchange rate policy from 2018 to 2019
19
2.2.3. Analysis of China's exchange rate policy from 2020-2022
22
2.3. China's exchange rate policy in 2023
24
2.3.1. Factors affecting China's exchange rate in 2023
24
2.3.2. Recommendations for China's exchange rate policy in 2023
Chapter 3: Implications to Vietnam
26
27
3.1. Impact of China's exchange rate policy on Vietnam’s economy over the period 2015-2022
27
3.3. Recommendations for the government and local enterprises of Vietnam dealing with
China's exchange rate policy in the short term and long term
29
3.4.1. Recommendations for the government dealing with China's exchange rate policy in
the short term
29
3.4.2. Recommendations for the government dealing with China's exchange rate policy in
the long-run
29
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3.4.3. Recommendations for Vietnam’s enterprises dealing with China's exchange rate
policy in the short term
30
3.4.4. Recommendations for Vietnam’s enterprises dealing with China's exchange rate
policy in the long term
31
Conclusion
33
References
34
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List of abbreviations
Abbreviation
Full meaning
ASEAN
Association of Southeast Asian Nations
CFETS
China Foreign Exchange Trade System
CNY
Chinese Yuan
GDP
Gross domestic product
PBOC
People's Bank of China
RMB
Renminbi
USD
US dollar
VND
Vietnamese Dong
WTO
World Trade Organization
List of tables
Order Table
Names of table
Page
1
2.1
China’s GDP and inflation rate from 2017-2019
19
2
2.2
China’s GDP and inflation rate from 2019-2022
22
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List of figures
Order Figure
Names of figure
Page
1
1.1
Four Vietnam's largest trading partner in 2022
11
2
2.1
China's exchange rate against USD over the period
15
2015-2017
3
2.2
China’s GDP and inflation rate from 2015- 2017
16
4
2.3
China’s imports and exports value from 2015-2017
16
5
2.4
China’s foreign investment from 2015-2017
17
6
2.5
China's exchange rate against USD over the period
18
2017-2019
7
2.6
China’s foreign invesment in the period 2015-2017
20
8
2.7
China's exchange rate against USD over the period
21
2019-2022
9
3.1
Vietnam’s exchange rate against Chinese Yuan over the period26
2005-2022
10
3.2
Vietnam’s imports and exports value to China from
26
2015 to 2022
11
3.3
Annual flow of FDI from China to Vietnam between
2011 and 2021
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Introduction
1. The urgency of the topic
Almost every nation's economic growth is entwined with and tied to the international
community in the framework of modern globalization. International commerce and foreign
exchange are necessary for international economic exchanges, thus each nation must establish a
thorough and sensible framework for its foreign exchange policy in order to support economic
development and preserve macroeconomic stability.
China's economy has been more integrated with the global economy since 1978 because
to economic reforms and market openings. China's foreign exchange policies have a significant
influence on the international economy and commerce as the second-largest economy in the
world. Under its opening-up strategy, the government has been easing and strengthening foreign
currency regulations, which has increased international commerce and capital inflows. While
this economic and financial interconnectedness has helped China's economy develop quickly, it
has also made it more difficult to correct structural imbalances and has recently had an impact
on the country's monetary policy. In addition to having a significant influence on the world
economy, China's foreign exchange policy has also had an impact on its economic ties with other
nations, especially those of its immediate neighborhood. China and Vietnam's economic and
commercial ties have improved recently, and by 2020, their bilateral commerce will exceed $100
billion. Vietnam's major commercial relationship is China, while China's second-largest ASEAN
trading partner is Vietnam. China is a significant source of foreign investment for Vietnam,
while Vietnam is a significant market for Chinese products.
It is crucial to comprehend how China's foreign exchange policies influence Vietnam
since it is a neighbor and maintains strong economic links with China. For governments,
entrepreneurs, and academics to successfully manage the complex Chinese foreign currency
market and its ramifications for Vietnam. Moreover, the years between 2015 and 2023 are
essential for the economic growth of both China and Vietnam, making this the appropriate time
period to examine the effects of Chinese foreign currency policy.
2. Research overview
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The literature on China's foreign exchange policy during the period from 2015 to 2023
and its implications for Vietnam is relatively limited. However, there are a number of studies
that have examined different aspects of this topic.
LIN Guijun and Ronald M. SCHRAMM (2003) took a closer look at the process of
China’s foreign exchange reform since 1979. The paper concluded that the core of China’
foreign exchange reform since 1979 has been a gradual transformation of its exchange allocation
mechanism from one that was governed by central planning to one in which market forces play
a significant role
Miss Sonali Das (2019) studied the development of China’s exchange rate regime which
has undergone gradual reform since the move away from a fixed exchange rate in 2005.
Ana Cardoso and António Portugal Duarte (2017) analyzed the impact of the Chinese
exchange policy on foreign trade with the European Union
Guogang Wang (2020) studied 70 years of China’s foreign exchange market development
through three historical period
Trịnh, T. Đ. (2009) studied the China’s exchange market before and after joining the
WTO
Most of the studies have been conducted a long-time ago and there has been no related
research about China’s foreign exchange policy and implications for Vietnam even though two
countries have established a strong bilateral trade relationship
3. Research objectives and tasks
3.1. Objectives
The objective of this paper is to analyze the foreign exchange policy of China in the
period of 2015-2023 and its implications for Vietnam. Specifically, the research aims to:
Examine the key foreign exchange policy measures implemented by China during this
period, including changes in exchange rate regimes, capital control measures, and foreign
exchange intervention of the government and the central bank.
Assess the impact of these policies on China's economy and the global economy,
including their effects on trade, investment, and capital flows.
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Evaluate the implications of China's foreign exchange policy for Vietnam, including the
effects on trade, investment, and capital flows, as well as any potential spillover effects on the
Vietnamese economy.
Provide policy recommendations for Vietnam in light of the implications of China's
foreign exchange policy, with the goal of minimizing negative impacts and maximizing
opportunities for economic growth.
3.2. Tasks
In order to achieve the research objectives outlined in the previous section, the following
tasks will be undertaken:
1) Introducing the topic "Foreign Exchange Policy of China in the period 2015-2023 and
its implication to Vietnam". This will include the urgency of the selected topic, a review of
academic articles, reports and some related information about the way the research is conducted
2) Summarizing about the close economic and trade relations between China and Vietnam
since 1991
3) Analyzing the Foreign Exchange Policy of China in the period 2015-2023 and its
impact on the Chinese Yuan (renminbi) and the Chinese economy. Also investigating about the
evolution of Foreign Exchange Policy of China, thereby making suggestions about China's
exchange rate policy should be in the long-term
4) Studying the influence of Foreign Exchange Policy of China on Vietnamese’s
economy and potential responses and recommendations for the government and the local
enterprises in the short and long run
4. Research object and scope
Research object: China’s Foreign exchange policy over the period 2015-2023
Research scope: China’s Foreign exchange policy impact on its economy and Vietnam’s
economy over the period 2015-2023
5. Research method
The research will be conducted using both secondary data sources, such as academic
articles, reports, and government publications such as: World Bank, OEC, Statista, China’s State
Administration of Foreign Exchange
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6. Structure of the thesis
In addition to the introduction, the end, the table of contents, the list of references, the
topic is presented in 3 chapters:
Chapter 1: Exchange rate policy and economic and trade relations between China and Vietnam
since 1991
Chapter 2: China's exchange rate policy from 2015-2023
Chapter 3: Implications to Vietnam
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Chapter 1: Exchange rate policy and economic and trade relations between China
and Vietnam since 1991
1.1. Exchange rate policy
1.1.1. Definition
Exchange rate policy refers to the set of strategies and actions implemented by a
government or central bank to manage the value of its currency relative to other currencies. The
primary objective of exchange rate policy is to achieve macroeconomic stability and promote
economic growth by influencing the exchange rate through a range of monetary and fiscal
measures
1.1.2. Types
To control the value of their currency, governments and central banks can use a variety
of exchange rate policies. The decision of exchange rate policy is influenced by a number of
variables, such as the economic situation of the nation, commercial relations, and political
concerns. Some frequent forms of exchange rate policy include the following:
 Fixed exchange rate policy: Under this policy, the government or central bank fixes the
exchange rate of its currency to a particular foreign currency or a basket of currencies.
The exchange rate remains constant within a pre-determined range, and the central bank
intervenes in the foreign exchange market to maintain the fixed rate.
 Floating exchange rate policy: Under this policy, the exchange rate is determined by
market forces of supply and demand, and the central bank does not intervene in the
foreign exchange market. The exchange rate is allowed to fluctuate freely, which can lead
to greater volatility but can also help to absorb external shocks.
 Managed float exchange rate policy: This policy is a combination of fixed and floating
exchange rate policies, where the central bank intervenes in the foreign exchange market
to manage the exchange rate within a certain range. The range may be wide or narrow,
depending on the country's economic conditions.
 Pegged exchange rate policy: Under this policy, the exchange rate of the domestic
currency is fixed to a foreign currency, but the central bank allows a limited degree of
fluctuation within a specific band. The band may be narrow or wide, depending on the
country's economic conditions.
 Crawling peg exchange rate policy: Under this policy, the exchange rate is allowed to
fluctuate within a particular band, which is adjusted periodically. The rate is allowed to
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crawl up or down over time, which can help to absorb external shocks and maintain
stability in the foreign exchange market.
1.1.3. Exchange rate policy instruments
Governments and central banks employ exchange rate policy instruments to manage the
relative value of their currency in reference to other currencies. There are two basic types for
these instruments: monetary and fiscal policy instruments.
Monetary policy instruments include adjusting interest rates to influence currency
demand, intervening in the foreign exchange market by buying or selling domestic currency to
influence its value, imposing capital controls to restrict capital flows, setting a target exchange
rate zone and intervening to maintain the exchange rate within that range, and establishing a
target exchange rate zone and intervening to maintain the exchange rate within that range.
In contrast, fiscal policy instruments include increasing government expenditure on
domestic goods and services to stimulate demand, modifying taxes to effect demand for
domestic goods and services, and employing trade policies like tariffs or subsidies to influence
demand.
A well-designed exchange rate strategy that includes an appropriate balance of monetary
and fiscal policy instruments can aid in establishing macroeconomic stability and fostering
economic growth. In contrast, an inefficient strategy can lead to negative economic effects such
as currency rate volatility, inflationary pressures, and balance of payment issues.
1.2. Economic and trade relations between China and Vietnam since 1991
Particularly in the areas of commerce and the economy, the connection between China
and Vietnam has been developing in recent decades. The two nations have aggressively pursued
economic and commercial cooperation ever since they formally established diplomatic relations
in 1991. They have also created a comprehensive strategic alliance.
In terms of trade, China is currently Vietnam's largest trading partner, and Vietnam is
China's third-largest trading partner in ASEAN. To improve commercial ties, a number of
measures and agreements have been implemented, notably the China-ASEAN Free Trade
Agreement. This specific agreement came into force in 2010, and it significantly decreased trade
barriers between China and Vietnam. Data from the General Department of Customs shows in
2022, China is Vietnam's largest trading partner with a total two-way trade turnover of 175.57
billion USD, followed by the US (123.86 billion USD), the Republic of Korea (86.38 billion
USD) and Japan (47.61 billion USD)
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China has become one of Vietnam's largest foreign investors on the investment front.
Chinese businesses have significantly boosted Vietnam's economic growth by concentrating
primarily on the industrial and infrastructure sectors, acting as a key catalyst for the country's
modernization and development.
Figure 1.1: Four Vietnam's largest trading partner in 2022
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Chapter 2: China's exchange rate policy from 2015-2023
2.1. Overview of China's exchange rate policy before 2015
2.1.1. Overview of China's exchange rate policy from 1949 to 1977
China's exchange rate policy from 1949 to 1977 was characterized by a strict system of
control, with the renminbi (RMB) pegged to the US dollar at a fixed rate. The basic context of
this period is the Chinese government, operating under a planned economy system, maintained
a highly centralized and directive-based approach to managing foreign exchange. Following the
founding of the People's Republic of China in 1949, the Chinese government adopted a policy
of exchange rate fixing, setting the value of the Chinese yuan against the US dollar at a fixed
rate of 2.46 yuan to 1 dollar
In the 1950s and 1960s, China's economy was heavily centralized and planned, with a
focus on heavy industry and investment in state-owned enterprises. During this period, the
government continued to maintain a fixed exchange rate policy, with only minor adjustments to
the yuan-dollar rate. However, the overvaluation of the yuan, coupled with inefficiencies in the
planned economy, led to a gradual decline in the country's international trade and economic
growth.
In the 1970s, China began to implement economic reforms aimed at modernizing the
economy and increasing efficiency. As part of these reforms, the government began to allow
greater flexibility in the exchange rate, allowing the yuan to fluctuate within a certain range
against the US dollar. This policy aimed to improve the competitiveness of Chinese exports, and
it did lead to a modest increase in trade. However, the government still maintained tight control
over the exchange rate, and the yuan remained significantly overvalued.
2.1.2. Overview of China's exchange rate policy from 1949 to 1977
From 1978 to 2004, China's foreign exchange policy underwent significant changes as
the country shifted towards a market-oriented economic system and implemented an "openingup" policy. Prior to 1978, China's foreign exchange policy was highly centralized and controlled
by the government. The country had a strict system of foreign exchange controls and a fixed
exchange rate, with the renminbi pegged to the US dollar. However, with the adoption of marketoriented economic reforms and the opening-up policy, China's foreign exchange policy began
to liberalize.
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In 1994, China introduced a dual-track foreign exchange system, which allowed for both
a managed floating exchange rate and a pegged exchange rate for certain transactions. This move
was intended to increase the flexibility of the renminbi and allow for more market-based
determination of its value. In 1997, China also began to allow foreign companies to invest in the
domestic stock market and to issue bonds in the domestic market. These moves were part of a
broader effort to increase foreign investment in China and to promote the development of the
domestic financial market.
In 2001, China officially joined the World Trade Organization (WTO), which further
liberalized its foreign exchange policy. As part of the agreement, China committed to reducing
its tariffs on imports and to increasing the transparency of its foreign exchange policies. This
move helped to further integrate China into the global economy and increased the flow of trade
and investment between China and other countries.
By 2004, China's foreign exchange policy had become much more market-oriented and
flexible. The government had reduced its control over the value of the renminbi and had allowed
for more market-based determination of its value. The country had also made significant
progress in integrating into the global economy and had become a major player in international
trade and investment. However, the government still retained some control over the foreign
exchange market, and the country's monetary policy continued to be guided by the government.
2.1.3. Overview of China's exchange rate policy from 2005 to 2014
From 2005 to 2014, China's foreign exchange policy continued to evolve as the country
further liberalized its economy and integrated more fully into the global economy. One of the
major changes during this period was the gradual appreciation of the renminbi against the US
dollar. This was a result of China's growing trade surplus and increasing foreign investment,
which put upward pressure on the value of the renminbi.
In 2007, China began to allow greater flexibility in the exchange rate by allowing the
renminbi to fluctuate within a narrow band against the US dollar. This move was intended to
help reduce the country's trade surplus and to encourage greater use of the renminbi in
international trade and investment.
In 2010, the Chinese government announced a new exchange rate mechanism that would
allow the renminbi to be more closely tied to a basket of currencies rather than just the US dollar.
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This move was intended to reduce the country's dependence on the US dollar and to make the
renminbi a more attractive currency for international trade and investment.
In 2014, The Chinese government also announced a plan to allow greater flexibility in
the exchange rate and to give the market a bigger role in determining the value of the renminbi.
This move was intended to reduce the country's dependence on exports and to promote greater
use of the renminbi in international trade and investment.
2.2. Analysis of China's exchange rate policy from 2015-2023
2.2.1. Analysis of China's exchange rate policy from 2015 to 2017
2.2.1.1. Policy description and its impact on CNY
China's exchange rate policy from 2015 to 2017 was a continuation of the gradual reforms
that had begun in the late 1970s. China's exchange rate policy from 2015 to 2017 was marked
by a gradual depreciation of the Chinese Yuan (CNY) against the US dollar (USD).
Figure 2.2: China's exchange rate against USD over the period 2015-2017
The year 2015 saw the Chinese government announce a momentous decision to allow the
renminbi to float within a broader range against the US dollar, granting market forces
unprecedented freedom to determine the RMB's value. This move was aimed at promoting
market dynamics and facilitating more unencumbered fluctuations of the RMB, leading to a
more robust foreign exchange market. This announcement reflected the Chinese government's
commitment to a more market-oriented currency and reduced reliance on the US dollar. In the
same year, the China Foreign Exchange Trade System (CFETS), a subsidiary of the PBOC,
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unveiled an exchange rate index composed of 13 currencies, signaling a paradigm shift away
from viewing renminbi exchange rate changes as a mere reflection of its association with the US
dollar. On 11 August 2015, the PBOC announced the adjustment of the quotation mechanism
for the RMB/USD central parity rate, setting off a new round of exchange rate reform under
which the RMB central parity rates become more market-driven. In December 2015, the RMB
exchange rate fixing mechanism became more transparent as the PBOC officially published for
the first time the composition of the reference currency basket. However, despite these moves,
the RMB began to experience a decline against the US dollar due to China's economic
deceleration and the US Federal Reserve's interest rate hike, spurring concerns over capital flight
and the possibility of a rapid RMB devaluation. To counteract a potential rapid RMB
depreciation, the Chinese government engaged in market intervention by buying RMB with
foreign currency reserves and tightening capital controls.
In 2016, the PBOC implemented a new mechanism to determine the daily fixing rate of
the CNY, which allowed the market forces to play a bigger role in determining the exchange
rate. This move was seen as a step towards greater exchange rate flexibility. However, the rapid
depreciation of the CNY in early 2016 prompted the PBOC to take more aggressive steps to
support the currency. These efforts were initially successful in stabilizing the CNY, but they also
led to a decline in foreign investment and increased uncertainty in global financial markets. In
response to the depreciation, the People's Bank of China intervened in the foreign exchange
market, selling large amounts of its foreign exchange reserves to support the RMB. The PBOC
also introduced a new mechanism for setting the daily RMB fixing rate, which it said would be
based more on market forces. Additionally, the Chinese government announced a series of
measures to curb capital outflows and stabilize the RMB, including tighter controls on crossborder capital flows and stricter regulations on foreign exchange transactions. These measures
were aimed at preventing a rapid depreciation of the RMB, which could have destabilized the
Chinese economy and financial markets. Despite these efforts, the RMB continued to depreciate
against the US dollar throughout 2016, hitting an eight-year low in December. This depreciation
of RMB and other measures taken by the Chinese government during 2016 indicate that China's
exchange rate policy shifted to more market-oriented and flexible approach, with less emphasis
on maintaining a stable exchange rate against the US dollar
In 2017, the CNY continued to depreciate against the USD, but at a slower pace than in
previous years. This was partly due to a stabilizing Chinese economy and a rebound in exports,
as well as a more cautious approach by the PBOC in managing the exchange rate. The People's
Bank of China also intervened in the foreign exchange market, buying large amounts of its
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foreign exchange reserves to support the RMB. Also in this year, China's exchange rate policy
shifted towards a more market-oriented and flexible approach, with a greater emphasis on
allowing market forces to play a greater role in determining the RMB exchange rate.
Additionally, the government announced a goal to open up the domestic financial market,
liberalize the interest rates, and increase the RMB's global usage. Despite the measures taken by
the Chinese government during 2017, the RMB continued to appreciate against the US dollar,
reaching a two-year high in December. This appreciation of RMB and other measures taken by
the Chinese government during 2017 indicate that China's exchange rate policy shifted to a more
market-oriented and flexible approach, with less emphasis on maintaining a stable exchange rate
against the US dollar.
2.2.1.2. Economic impact
The period of 2015-2017 saw significant changes in China's foreign exchange policy,
which had a significant impact on the Chinese economy. One of the key changes was the
transition to a more flexible exchange rate regime in 2015, which led to a depreciation of the
renminbi. Overall, China's exchange rate policy from 2015 to 2017 had a mixed impact on the
country's economy
China's exchange rate policy from 2015 to 2017 had a significant impact on the country's
GDP and inflation. The depreciation of the renminbi had a mixed impact on China's trade and
investment relations with other countries. On one hand, it made Chinese goods cheaper in global
markets, which led to an increase in exports and supported economic growth. On the other hand,
it also increased the cost of imports, which led to a trade deficit and had a negative impact on
the balance of payments. Additionally, the depreciation of the renminbi also led to an increase
in inflation, as the cost of imported goods rose
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Figure 2.3: China’s GDP and inflation rate from
2015- 2017
Lecturer: Assoc. Prof. Ph.D Nguyen Thuong Lang
Figure 2.4: China’s imports and exports value from
2015-2017
Another important aspect of China's foreign exchange policy during this period was the use of
capital controls. The restrictions on foreign currency purchases and increased scrutiny of
outbound investment led to a decline in foreign investment in China and made it more difficult
for Chinese companies to invest
abroad. This had a negative impact
on economic growth, as foreign
investment is an important source of
funding for Chinese companies and
is a key driver of economic growth.
Additionally, the capital controls
also made it more difficult for
Chinese companies to access foreign
capital, which had a negative impact
on the country's ability to participate
Figure 2.5: China’s foreign investment from 2015-2017
in global trade and investment
The depreciation of the renminbi and the use of capital controls also had an impact on
China's financial stability. The depreciation of the renminbi led to a decline in foreign exchange
reserves, which raised concerns about the ability of the Chinese government to maintain
financial stability. Additionally, the capital controls also raised concerns about the potential for
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a financial crisis in China, as the restrictions on foreign currency purchases and increased
scrutiny of outbound investment have led to a decline in foreign investment, which has made it
more difficult for Chinese companies to access foreign capital and may lead to a liquidity crunch
To summarize, China's foreign exchange policy in the period of 2015-2017 had a
significant and mixed impact on the Chinese economy. The depreciation of the renminbi
supported economic growth but also led to a trade deficit, inflation and a decline in foreign
exchange reserves. The use of capital controls had a negative impact on foreign investment and
financial stability, which could lead to a liquidity crunch
2.2.2. Analysis of China's exchange rate policy from 2018 to 2019
2.2.2.1. Policy description and its impact on CNY
China's exchange rate policy from 2018 to 2019 was heavily influenced by the trade
tensions between China and the United States. The RMB's exchange rate was affected by the
trade war, with the RMB depreciating against the US dollar due to the uncertainty caused by the
trade tensions.
Figure 2.6: China's exchange rate against USD over the period 2017-2019
In 2018, China's exchange rate policy was focused on maintaining stability in the value
of the Chinese Yuan (also known as the Renminbi or CNY) against a basket of other currencies.
The Chinese government uses a managed float system to set the value of the Yuan, rather than
allowing it to be determined by market forces. The central bank, the People's Bank of China,
intervenes in the foreign exchange market to buy or sell Yuan in order to keep the exchange rate
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within a certain range. In 2018, the government's goal was to prevent sharp fluctuations in the
exchange rate, which could have negative impacts on the Chinese economy. The Chinese
government also sought to keep the exchange rate competitive in order to support exports and
boost economic growth. However, there were concerns that the Chinese government was
manipulating the exchange rate to make the Yuan artificially weaker than its true market value,
which drew criticism from other countries and international organizations.
In 2019, the Chinese government announced that it would allow the RMB to fluctuate
more freely against the US dollar and other currencies, in order to provide more flexibility in the
exchange rate and to reduce the impact of the trade tensions on the RMB. However, the year was
marked by increasing pressure on the Chinese government to allow the Yuan to appreciate
against the US dollar. This pressure came from the United States and other countries, which
accused China of devaluing the Yuan to make its exports more competitive. Additionally, there
were concerns that a weaker Yuan could exacerbate the trade deficit between China and the
United States. In response to these pressures, the Chinese government allowed the Yuan to
appreciate against the US dollar during the first half of 2019. However, later in the year, the
trade tensions between the United States and China escalated, and the Chinese government
began to intervene in the foreign exchange market to prevent the Yuan from appreciating too
much. Additionally, the Chinese central bank introduced measures to stabilize the currency,
including cutting reserve requirements for banks and lowering interest rates. The government
also made efforts to reduce the dependence on the US dollar as the primary currency for trading
and transactions, and began to create a market-oriented exchange rate system. This was done to
provide more stability and predictability in the economy. Despite these efforts, the Yuan
depreciated against the US dollar at the end of 2019, due to the uncertainty surrounding the USChina trade negotiations and the global economic slowdown.
2.2.2.2. Economic impact
The government's efforts to stabilize the renminbi and maintain a relatively stable
exchange rate had a positive impact on China's economic growth by providing a stable
environment for trade and investment
In 2018, China's GDP growth rate was 6.6%, which was a slight decrease from the
previous year, but still relatively stable. However, in 2019, China's GDP growth rate decreased
to 6.1%, which was the slowest in nearly three decades, due to the trade tensions with the United
States, and the impact of the global economic slowdown. The government's efforts to stabilize
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the renminbi and maintain a relatively stable exchange rate also helped to keep inflation under
control. The stable exchange rate helped to prevent a rapid increase in the cost of imported goods,
which would have led to higher inflation. Additionally, the consumer price index (CPI) inflation
rate remained relatively stable during this period, averaging around 2% in 2018 and 2019, which
was within the government's target range.
2017
2018
2019
GDP growth
6.9%
6.7%
6.1%
Inflation rate
1.6%
2.1%
2.9%
Table 2.1: China’s GDP and inflation rate from 2017-2019
The use of capital controls continued to have a negative impact on foreign investment.
The government implemented stricter regulations on outbound investment and foreign currency
transactions, which led to a decline in foreign investment and made it more difficult for Chinese
companies to invest abroad. This had a negative impact on economic growth, as foreign
investment is an important source of funding for Chinese companies and a key driver of
economic growth
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Figure 2.7: China’s foreign invesment in the period 2015-2017
The government's efforts to stabilize the renminbi and maintain a relatively stable exchange rate
also helped to maintain financial stability. The use of capital controls helped to prevent a rapid
outflow of capital that could have destabilized the financial system. Additionally, the central
bank also implemented stricter regulations on currency transactions which helped to prevent
financial instability. However, the trade tensions with the United States and the impact of the
global economic slowdown had also put pressure on the renminbi, and the government had to
intervene in the foreign exchange market to prevent excessive depreciation of the renminbi.
In conclusion, China's foreign exchange policy in the period of 2018-2019 had a positive
impact on the Chinese economy by providing a stable environment for trade and investment, but
the use of capital controls had a negative impact on foreign investment
2.2.3. Analysis of China's exchange rate policy from 2020-2022
2.2.3.1. Policy description and its impact on CNY
China's exchange rate policy from 2020 to 2022 was heavily influenced by the global
economic impact of the COVID-19 pandemic. The RMB's exchange rate was affected by the
economic uncertainty caused by the pandemic, with the RMB appreciating against the US dollar.
Figure 2.8: China's exchange rate against USD over the period 2019-2022
In 2020, China's exchange rate policy continued to focus on maintaining stability in the
value of the Chinese Yuan (CNY) against a basket of other currencies. However, the year was
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marked by a number of challenges and disruptions to the global economy due to the outbreak of
COVID-19 pandemic. The sudden and severe global economic downturn led to a significant
depreciation of the Chinese Yuan against the US dollar in the early part of the year. However,
as the Chinese economy began to recover more quickly than other major economies, the Chinese
central bank intervened in the foreign exchange market to prevent the Yuan from depreciating
too much. Additionally, the central bank implemented measures to stabilize the currency, such
as lowering interest rates and cutting reserve requirements for banks. Despite these efforts, the
Chinese Yuan depreciated against the US dollar throughout the year, due to the economic
uncertainty caused by the pandemic and the tensions between the US and China. Furthermore,
the US government also accused China of currency manipulation and the US President signed
an executive order allowing for tariffs on goods from countries that undervalue their currencies.
The Chinese government, however, denied the accusations and argued that the depreciation of
the Yuan was a result of market forces
China's exchange rate policy in 2021 has been aimed at maintaining a balance between
exchange rate stability and market flexibility. The Chinese government has been using a
managed float system to determine the value of the renminbi, which allowed the currency to
fluctuate within a 2% band while also being guided by a daily reference rate set by the People's
Bank of China (PBOC). This approach aimed to balance the need to maintain stability in the
value of the renminbi, which is important for China's economic stability and its role in the global
economy, with the need to allow market forces to play a role in determining the currency's value.
The Chinese government also continued to intervene in the foreign exchange market as
necessary to prevent excessive depreciation of the renminbi, which could lead to capital outflows
and destabilize the economy. This intervention was mostly through the state-owned banks'
purchasing or selling of foreign currencies in the open market, which affected the supply and
demand of foreign currencies, thus affecting the exchange rate. The PBOC also used various
tools such as setting interest rates, adjusting reserve requirements, and issuing short-term
liquidity loans to commercial banks to guide the market and maintain stability.
Chinese yuan in 2022 underwent the fastest and deepest adjustment since the major
reform of the country's foreign exchange formation system in 1994. The Chinese yuan against
the US dollar fell more than 13 percent in eight months - from 6.3 in March to 7.3 in November
2.2.3.2. Economic impact
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The government's efforts to stabilize the renminbi and maintain a relatively stable
exchange rate had a positive impact on China's economic growth by providing a stable
environment for trade and investment. In 2020, China's GDP growth rate decreased to 2.3% due
to the outbreak of COVID-19 pandemic, but rebounded to 8.1% in 2021, which showed the
resilience and adaptability of China's economy in the face of adversity.
However, the use of capital controls continued to have a negative impact on foreign
investment. The government implemented stricter regulations on outbound investment and
foreign currency transactions, which led to a decline in foreign investment and made it more
difficult for Chinese companies to invest abroad.
The government's efforts to stabilize the renminbi and maintain a relatively stable
exchange rate also helped to keep inflation under control. The stable exchange rate helped to
prevent a rapid increase in the cost of imported goods, which would have led to higher inflation.
Additionally, the outbreak of COVID-19 pandemic has had a significant impact on the inflation
rate, and it dropped to 0.9% in 2020, but rebounded to 1.3% in 2021
The government's efforts to stabilize the renminbi and maintain a relatively stable
exchange rate also helped to maintain financial stability. The use of capital controls helped to
prevent a rapid outflow of capital that could have destabilized the financial system. However,
the outbreak of COVID-19 pandemic has also put pressure on China's financial stability, and the
government has implemented monetary and fiscal policies to mitigate the impact of the
pandemic, such as cutting interest rates and increasing government spending.
2020
2021
2022
GDP growth
-2.3%
8.1%
3%
Inflation rate
0.9%
1.3%
2%
Table 2.2: China’s GDP and inflation rate from 2020-2022
2.3. China's exchange rate policy in 2023
2.3.1. Factors affecting China's exchange rate in 2023
2.3.1.1. Internal factors
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The rise and fall of the yuan in 2023 will be mostly determined by China's economic
fundamentals. If Chinese economic growth recovers significantly in 2023, net capital outflows
will decline or potentially reverse, providing further support to the renminbi.
The Chinese government’s decision to abandon its zero-COVID policy since the
January 8 makes this scenario more likely, not least because that policy constituted the most
powerful constraint on the effective implementation of expansionary fiscal and monetary
policy. Domestic and foreign investors are generally enthusiastic about the prospects for
China's economic recovery and the rising value of the yuan, as a result of the optimization of
pandemic responses. China's yuan has rallied since the beginning of 2023, as the country eases
its COVID-19 control measures and reopens its borders.
While household consumption will rebound in the foreseeable future, supply chains may
take longer than expected to repair. As a result, inflation may rise sometime in 2023. At the
same time, the PBOC may need to lower interest rates to give the economy a boost. The failure
to strike the right balance between anti-inflation and pro-growth policies, and any misstep in
implementing expansionary fiscal and monetary policy, will negatively affect the renminbi
exchange rate. As the PBOC stated that “China will closely watch the trend and changes in
inflation and keep the prices of energy and food stable”, the fluctuations and volatility of RMB
will be expected to be ensured.
2.3.1.2. External factors
In 2023, the spillover effects of Fed's tightening monetary policy are expected to continue.
Due to the decline in economic output potential this year, the Fed will likely increase its tolerance
for economic recession. The monetary tightening may last longer than anticipated, and the US
dollar will likely enter a second phase of appreciation. Assuming all other conditions remain
unchanged, the yuan exchange rate will continue to fluctuate in both directions. Due to the
combination of high inflation and high unemployment, there is a great likelihood that the Fed
will lower interest rates gradually at the end of 2023, and the dollar's trend will be strong in the
start of the year before becoming weaker. As the Chinese economy is more integrated into
economic and financial globalization than it was before the global financial crisis of 2008, the
spillover effect of the Fed's monetary tightening on China will grow into shock, and the yuan
exchange rate will be subject to increasing pressure.
Another important factor that could impact the yuan's exchange rate in 2023 is the
ongoing trade tensions between China and other major economies such as the US and the EU. If
trade negotiations between China and the US continue to be rocky or if new trade disputes arise,
this could negatively impact investor sentiment towards the yuan and lead to a depreciation of
the currency.
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2.3.2. Recommendations for China's exchange rate policy in 2023
One of the key considerations for China's exchange rate policy is that it is a developing
economy that is heavily dependent on exports. As such, some experts recommend that China
should maintain a relatively weak currency in order to make its exports more competitive on the
global market. This could be achieved through a variety of means, such as through intervention
in the foreign exchange market to keep the value of the renminbi low, or through the use of
capital controls to limit the inflow of foreign investment.
China's exchange rate policy in 2023 should aim to promote economic stability and
growth while maintaining a balance between domestic and external factors. A more marketoriented exchange rate regime, which allows for greater flexibility and responsiveness to market
forces, could help to promote greater stability and efficiency in the economy. A flexible
exchange rate policy would enable the RMB to appreciate or depreciate in response to changes
in supply and demand in the foreign exchange market. This would help to reduce the impact of
external shocks on the economy, such as changes in global commodity prices or shifts in
international capital flows. This would also make the RMB more responsive to changes in the
global economy, which would help to promote greater stability in the long-term. Furthermore, it
would also increase the RMB's internationalization process, and make it more attractive to be
used as a global reserve currency. Additionally, a more open and transparent foreign exchange
market would help to promote greater efficiency and stability in the economy. This would also
help to reduce the country's dependence on the US dollar as the primary currency for trading and
transactions, which would help to reduce China's vulnerability to external shocks. It would also
increase the transparency in the foreign exchange market, which would help to attract more
foreign investment and boost the economy. Furthermore, it is important for the government to
maintain a balance between domestic and external factors in order to promote economic stability.
This includes, monetary policy, fiscal policy, and the use of various tools such as interest rate
adjustments and capital controls. The government should use these tools in a flexible and timely
manner, to maintain economic stability and promote economic growth.
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Chapter 3: Implications to Vietnam
3.1. Impact of China's exchange rate policy on Vietnam’s economy over the period 20152022
Figure 3.1: Vietnam’s exchange rate against Chinese Yuan over the period 2005-2022
Figure 3.2: Vietnam’s imports and exports value to China from 2015 to 2022
From 2015 to 2022, China's exchange rate policy has had a significant impact on the trade
deficit of Vietnam against China. Over the period, China has maintained a relatively stable
exchange rate policy, with a managed float of the RMB against a basket of currencies. However,
despite this, the RMB has appreciated against the Vietnamese Dong, making Chinese goods
more expensive than Vietnamese goods in the international market. This has led to a decrease in
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Chinese exports to Vietnam, but it has not been sufficient to offset the large amount of goods
imported from China. Vietnam's imports from China have been primarily machinery, equipment,
and raw materials, which are essential for the country's production and development. The trade
deficit between the two countries has been widening over the years, with Vietnam being unable
to compete with China's manufacturing capabilities and lower labor costs. This has led to a larger
trade deficit for Vietnam, which has put pressure on the country's balance of payments and its
economic growth. Furthermore, the trade deficit has also had an impact on Vietnam's domestic
production and employment, as it has made it difficult for domestic firms to compete with cheap
Chinese imports. This has led to a decline in domestic production, increased unemployment and
reduced income for the workers.
A weaker Vietnamese dong against the RMB during 2015-2022 also made Vietnam more
attractive to Chinese investors, as it means that their investments would be cheaper in terms of
RMB. Chinese companies could take advantage of the favorable exchange rate to acquire
Vietnamese assets or invest in new projects in the country. This led to an increase in China's FDI
to Vietnam, which could bring new capital and technology to the Vietnamese economy
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Figure 3.3: Annual flow of FDI from China to Vietnam between 2011 and 2021
3.3. Recommendations for the government and local enterprises of Vietnam dealing with
China's exchange rate policy in the short term and long term
3.4.1. Recommendations for the government dealing with China's exchange rate
policy in the short term
1) Implementing timely monetary and fiscal policies: The government may use monetary
policy tools, such as adjusting interest rates, to stabilize the economy and mitigate the impacts
of China's exchange rate policy. Fiscal policies, such as tax breaks or subsidies, may also be
used to support domestic industries and mitigate the negative impacts of China's exchange rate
policy.
2) Increasing support for domestic industries: The government needs to increase support
for domestic industries, such as through tax breaks, subsidies, or other forms of assistance, in
order to help them compete with Chinese imports. This can be done by providing financial
assistance, training, and other forms of support to help domestic industries improve their
productivity, efficiency and competitivenes
3) Implementing trade remedies: The government may implement trade remedies such as
tariffs, quotas, or anti-dumping measures in order to protect domestic industries from Chinese
imports. This can be done by imposing tariffs on Chinese imports to make them less competitive,
or by imposing quotas to limit the amount of Chinese imports that can be brought into Vietnam.
4) Adjusting the exchange rate range: Vietnam's government can change its exchange rate
range to deal with China's exchange rate policy by adjusting the band within which the
Vietnamese dong can fluctuate against the Chinese yuan. If China decides to devalue its currency
in order to make its exports more competitive, this could put pressure on Vietnam's exports and
could potentially harm its economy. In response, the Vietnamese government could choose to
devalue the dong by widening the band within 3% to 5% to make Vietnamese exports cheaper
in yuan terms, which could help to maintain the competitiveness of Vietnamese exports vis-avis Chinese exports.
3.4.2. Recommendations for the government dealing with China's exchange rate
policy in the long-run
1) Building a more robust domestic economy: The government may focus on building a
more robust domestic economy by investing in infrastructure, education, and technology, in
order to increase the competitiveness of domestic industries and reduce dependence on exports.
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This can be done by increasing government spending on infrastructure, education, and
technology, and by implementing policies to support innovation and entrepreneurship.
Additionally, the government may also focus on improving the overall business environment in
Vietnam, by implementing policies to improve infrastructure, reduce corruption and
bureaucracy, and promote innovation and entrepreneurship
2) Diversifying trade partners: The government may focus on diversifying trade partners
in order to reduce dependence on China and mitigate the impact of China's exchange rate policy
on the economy. This could include negotiating trade agreements with other countries, and
promoting trade relations with countries in other regions. The government may also focus on
encouraging foreign direct investment from other countries to reduce dependence on China as a
major investor and to support economic growth in the long term.
3) Encouraging foreign investment: The government may encourage foreign investment
from other countries to mitigate the negative impacts of the exchange rate policy, and reduce the
dependence on China as a major investor. This can be done by providing incentives and support
for foreign investors, and by promoting trade agreements with other countries.
4) Developing domestic financial markets: The government may focus on developing
domestic financial markets, such as by increasing access to credit and capital, and by
implementing regulations to promote stability and transparency, in order to increase the
resilience of the economy to external shocks
3.4.3. Recommendations for Vietnam’s enterprises dealing with China's exchange
rate policy in the short term
1) Hedging currency risk: Enterprises may focus on hedging currency risk in order to
mitigate the impact of China's exchange rate policy on their business. This could include using
financial instruments such as currency forwards, options, or swaps to protect against fluctuations
in exchange rates. For example, they may use currency forwards to lock in a specific exchange
rate for a future date, or use currency options to protect against potential currency fluctuations.
Additionally, they may also engage in risk management strategy development, such as by
implementing a currency risk management framework, to identify, measure, monitor, and
manage currency risks.
2) Adjusting prices: Enterprises may focus on adjusting prices in order to mitigate the
impact of China's exchange rate policy on their business. This could include adjusting prices for
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exports to China, or for inputs sourced from China, in order to offset the impact of changes in
the exchange rate. For example, they may focus on implementing pricing strategies, such as
dynamic pricing or value-based pricing, to adjust prices in response to changes in exchange rates.
Additionally, they may also engage in pricing analysis, such as by conducting a cost-volumeprofit analysis, to determine the impact of changes in exchange rates on their prices and
profitability.
3) Reducing costs: Enterprises may focus on reducing costs in order to mitigate the impact
of China's exchange rate policy on their business. This could include reducing costs for inputs
sourced from China, or for exports to China, in order to offset the impact of changes in the
exchange rate. For example, they may focus on implementing cost reduction strategies, such as
by streamlining processes, reducing waste, or outsourcing, in order to reduce their costs.
Additionally, they may also focus on implementing cost management systems, such as by
implementing a budgeting and forecasting system, to monitor and control their costs.
4) Seeking government support: Enterprises may focus on seeking support from the
government in order to mitigate the impact of China's exchange rate policy on their business.
This could include seeking financial or tax incentives, or participating in government-led trade
missions, in order to offset the impact of changes in the exchange rate. For example, they may
focus on seeking financial or tax incentives, such as by applying for government grants, or by
participating in government-led trade missions, in order to offset the impact of changes in the
exchange rate. Additionally, they may also focus on engaging with government agencies and
organizations, such as by participating in trade fairs, conferences, and seminars, to stay updated
on the latest trade policies and regulations, and to build relationships with government officials
and other industry leaders. Furthermore, they may also engage in lobbying activities, such as by
providing feedback on trade policies, or by participating in advocacy groups, in order to
influence government policies and regulations that affect their business
3.4.4. Recommendations for Vietnam’s enterprises dealing with China's exchange
rate policy in the long term
1) Diversifying exports markets: Enterprises may focus on diversifying export markets in
order to reduce dependence on China and mitigate the impact of China's exchange rate policy
on their business. This could include exploring new markets and building relationships with new
customers in other countries. For example, they may focus on expanding exports to countries in
other regions, such as Europe, North America, or Africa, in order to reduce their dependence on
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China as a major export market. Additionally, they may also engage in market research and
analysis to identify new opportunities in other countries, and to develop strategies to access these
markets.
2) Increasing competitiveness: Enterprises may focus on increasing their competitiveness
by investing in technology, improving production processes, and reducing costs. This can help
to mitigate the negative impacts of China's exchange rate policy and make the enterprises more
competitive in the global market. For example, they may focus on investing in automation,
artificial intelligence, and other technologies, in order to improve their productivity, efficiency
and competitiveness. Additionally, they may also focus on improving their production processes,
such as by implementing quality control systems, and by implementing lean manufacturing
practices, in order to reduce costs and increase efficiency.
3) Developing domestic supply chains: Enterprises may focus on developing domestic
supply chains in order to reduce dependence on China for inputs and reduce exposure to China's
exchange rate policy. This could include building relationships with domestic suppliers, and
investing in domestic production facilities. Additionally, they may also focus on developing
supply chain management strategies, such as by implementing supplier quality management
systems, and by implementing inventory management systems, in order to improve their supply
chain resilience and reduce their dependence on China.
4) Investing in research and development (R&D): Enterprises may focus on investing in
research and development in order to improve their products and services, and to create new
opportunities. This can help to mitigate the negative impacts of China's exchange rate policy and
make the enterprises more competitive in the global market. For example, they may focus on
investing in R&D to create new products or services, or to improve existing ones, in order to
increase their competitiveness and to access new markets. Additionally, they may also focus on
engaging in partnerships with universities, research institutions, and other organizations, in order
to access new technologies and to collaborate on research projects.
5) Building strategic partnerships: Enterprises may focus on building strategic
partnerships with other companies, both domestic and foreign, in order to share risks, access
new technologies and markets, and to increase their competitiveness in the global market. For
example, they may focus on building strategic partnerships with other companies, such as by
forming joint ventures, or by forming strategic alliances, in order to share risks, access new
technologies and markets, and to increase their competitiveness in the global market.
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Conclusion
In conclusion, China's foreign exchange policy during the period of 2015-2023 has been
a complex and evolving phenomenon. The paper has shown that the policy has been driven by a
combination of economic and political considerations, including a desire to boost exports,
respond to domestic economic conditions, and increase China's influence in global financial
markets.
In 2015, China made a surprise devaluation of the RMB, which led to a period of volatility
in the currency's value. This move was widely seen as an attempt to boost exports and respond
to slowing economic growth. However, the devaluation also had significant implications for
other countries, particularly those with strong trade ties to China, such as Vietnam. In the
following years, China took steps to stabilize the currency, including the introduction of a
"counter-cyclical factor" in the daily fixing of the RMB exchange rate and increased use of
foreign exchange reserves to support the currency. These measures helped to reduce the
volatility of the RMB and stabilize the currency, but they also had the effect of limiting the
flexibility of the currency and making it less responsive to market forces. More recently, China
has continued to allow for greater flexibility in the RMB exchange rate, with a shift towards a
more market-determined exchange rate. This has been accompanied by a gradual liberalization
of the country's capital account, with the lifting of restrictions on foreign investment and
outflows of capital. These measures have helped to reduce the reliance on government
intervention in the currency market and increase the role of market forces in determining the
value of the RMB.
The implications of China's foreign exchange policy for Vietnam have been significant.
Vietnam's economy is heavily dependent on exports, and a stronger RMB has made Vietnamese
goods more expensive in the Chinese market. This has led to a decline in Vietnam's exports to
China and has put pressure on the country's trade balance. Additionally, as China has liberalized
its capital account, there has been an influx of capital into Vietnam, which has led to increased
competition in the domestic market and has put pressure on the country's currency. Therefore,
the Vietnam’s government and local enterprises must take timely and reasonable short-term and
long-term measure to respond and take advantages of China’s exchange rate policy
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