Academic journal article Journal of Management Information and Decision Sciences

China's Impact on Mongolian Exchange Rate

Academic journal article Journal of Management Information and Decision Sciences

China's Impact on Mongolian Exchange Rate

Article excerpt

INTRODUCTION

Well-endowed with mineral resources, strong potential in agriculture and tourism and a young and dynamic population, Mongolia is bordered by China, its biggest trading partner. In the past three decades, Mongolia has transformed itself from a socialist economy to a vibrant multiparty democratic country. Comparing to the Chinese Yuan, the Mongolian Tugrik has depreciated more than 50% in the past decade. Thus, studying the impact to Mongolian Tugrik relative to Chinese Renminbi is an important topic to Mongolia.

Mongolian Economy

Due to the transition from socialist economy to market-based economy in early 1990, Mongolia has experienced a painful transformation recession, bottomed out in 1993 and begun to recover thereafter. By 2001, its real GDP has reached the level prior to the transition. The primary sector is the principal engine of Mongolia's quick recovery, although its share in GDP has been declining since 1990. Mongolia's heavy dependence on exports of a few key commodities has made its economy particularly vulnerable to fluctuations in commodity prices and natural disaster. Inflation rate in Mongolia has surged sharply in the first few years of transition, peaked at more than 250 percent in 1993, fell rapidly thereafter and reached the single-digit range by 2000. On the other hand, its economy has grown rapidly at an average annual rate of 8.4% during the period 2004-2006 and reached 10.2% in 2007. Per capita income has more than doubled since 2004 and reached US$1960 in 2008. Nonetheless, global financial crisis did not affect Mongolian economy seriously. In the twenty century, conflicts between foreign investors and "China-phobic" resource nationalism causes a severe decline in Foreign Direct Investment (FDI) in Mongolia from around 44% in 2011 to shrinks dramatically to 0.8 percent in 2015.

In 2016, Mongolia faces a debt crisis with its budget deficit tripled to 3.67 trillion tugrik, total external trade drops 2.3 percent, banks' non-performing loans rise 25 percent and the tugrik falls 20 percent, the fifth worst among all exotic currencies. To overcome the difficulty, Mongolia gets a three year Extended Fund Facility (EFF) program with 440 million USD rescue loan from the International Monetary Fund (IMF) to address balance-of-payment pressures, help the government repay looming debts, stabilize the domestic currency and boost confidence in the banking sector. One part of the EFF that the People's Bank of China is expected to extend a 15 billion RMB swap line with Mongol Bank.

China's Impact on Mongolian Economy

The most dramatic event in the global economy over the past few decades is the rise of China as a global economic power. Beginning from the late 1970's, China changes from planned economy to market economy that has led to economic growth sharply over the past few decades (Andressen, Mubarak & Wang, 2013). As a result, Mongolia gets closer to China recently. China is the biggest trading, investment and tourism partner of Mongolia. China takes 84% of total Mongolian export, supplies 30% of Mongolia's import, invest most in Mongolia's mining sector that exports to China mainly, around 60% of all tourists to Mongolia are from Mainland China and accounting for roughly 50 percent of the FDI in Mongolia. Thus, Mongolia depends on China greatly.

Mongolia has been enjoying rapid growth for the past two decades because of strong Chinese demand. However, this economy slammed by recent China's slowdown. Minerals are selling for less around the world because of oversupply, weaker demand in China and a tandem drop in energy prices as China's transition from investment driven economy to consumer driven economy.

Recently, Mongolia's economic downturn attributes to plummeting commodity prices in the global market. The price index for all types of coal supplied by Mongolia, its biggest export by volume, decreases by 15 percent from 2014 to 2015. …

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