Abstract
A partial equilibrium model is used to analyze effects of Chinese currency revaluation on world fiber markets. Unique characteristics of this model include incorporation of a regional supply response of cotton, substitutability between cotton and manmade fibers, and linkage between raw fiber and textile sectors. Simulation results show renminbi revaluation is likely to increase China’s fiber imports and lower domestic cotton prices. Internationally, the world cotton price, polyester price, and cotton trade are expected to increase. A scenario modeling currency devaluation in China is run to test the stability of the model and ascertain its accordance with economic theory. (JEL F17, F42, F47, O2) With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand, the People’s Bank of China, with authorization of the State Council, is hereby making the following announcements regarding reforming the RMB exchange rate regime: Starting from July 21, 2005, China will reform theexchangerateregimebymovingintoamanaged floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the U.S. dollar and the RMB exchange rate regime will be improved with greater flexibility.
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