Q1. (8 points) There are two exchange rates between the Renminbi RMB and the USD: the offshore exchange rate CNH and the onshore exchange rate CNY. CNH is free to fluctuate in response to market supply of and demand for RMB while CNY is closely controlled by the People's Bank of China (PBOC) with limited flexibility. In our lecture we went through an example of export over- invoicing to arbitrage the difference between the stronger offshore RMB (RMB 6.5/USD) and weaker onshore RMB (RMB 7.0/USD). The official Chinese BOP statistics shows credit of trade balance account, and debit of other investments account.? How would the transaction affect the CNH and CNY exchange rates? How should it be recorded correctly in China's BOP statistics? PBOC pledges to use a simple formula based on the previous day's closing spot rate plus overnight changes in the dollar's value against a basket of global currencies to set the central parity rate for the next trading day. This is the daily trading reference around which the CNY exchange rate can float up or down by no more than 2 percent. 2 Note that the over-invoiced exports, being "fake" exports, are never exported. Instead they are shipped to bonded warehouses in China's special export zones where they will clear customs and officially "counted as China's exports before they are shipped back to the Chinese exporters, having never left the country. Q1. (8 points) There are two exchange rates between the Renminbi RMB and the USD: the offshore exchange rate CNH and the onshore exchange rate CNY. CNH is free to fluctuate in response to market supply of and demand for RMB while CNY is closely controlled by the People's Bank of China (PBOC) with limited flexibility. In our lecture we went through an example of export over- invoicing to arbitrage the difference between the stronger offshore RMB (RMB 6.5/USD) and weaker onshore RMB (RMB 7.0/USD). The official Chinese BOP statistics shows credit of trade balance account, and debit of other investments account.? How would the transaction affect the CNH and CNY exchange rates? How should it be recorded correctly in China's BOP statistics? PBOC pledges to use a simple formula based on the previous day's closing spot rate plus overnight changes in the dollar's value against a basket of global currencies to set the central parity rate for the next trading day. This is the daily trading reference around which the CNY exchange rate can float up or down by no more than 2 percent. 2 Note that the over-invoiced exports, being "fake" exports, are never exported. Instead they are shipped to bonded warehouses in China's special export zones where they will clear customs and officially "counted as China's exports before they are shipped back to the Chinese exporters, having never left the country
