China holds one of the largest forex reserves in the world. China has managed to accumulate such huge reserves from a record growth in their exports. Till recently, the Chinese currency was pegged at a fixed value to the USD. On July 21 last year China, ended this decade old peg and allowed the Yuan to float in a highly-guarded narrow trading band, while allowing it to appreciate marginally. The Yuan’s current value is 20% to 40% below its true market value.
Its undervalued currency gives China a huge trade advantage vis a vis other countries and is one of the key reasons for its high GDP growth. China has been facing multilateral pressure to allow its currency to float. China’s Central Bank Governor commented in Davos on the side lines of the World Economic Summit that China will follow a prudent economic policy and introduce gradual decontrol of the Yuan.
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