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Eco Assignment

The Chinese government historically pegged the value of the Yuan to the U.S. dollar to make Chinese exports more affordable and appealing to foreign consumers. This kept the Yuan inexpensive and encouraged export activity, which boosted China's economy. In 2005, China moved to a managed float system where it adjusts the Yuan's value as needed. Allowing the Yuan to float freely could increase export competitiveness but also shrink the economy if the Yuan falls rapidly. The U.S. and EU should adopt a neutral stance unless evidence shows China is manipulating its currency, in which case involving international organizations like the WTO or IMF could help resolve issues.

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Priya Vardhan
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38 views

Eco Assignment

The Chinese government historically pegged the value of the Yuan to the U.S. dollar to make Chinese exports more affordable and appealing to foreign consumers. This kept the Yuan inexpensive and encouraged export activity, which boosted China's economy. In 2005, China moved to a managed float system where it adjusts the Yuan's value as needed. Allowing the Yuan to float freely could increase export competitiveness but also shrink the economy if the Yuan falls rapidly. The U.S. and EU should adopt a neutral stance unless evidence shows China is manipulating its currency, in which case involving international organizations like the WTO or IMF could help resolve issues.

Uploaded by

Priya Vardhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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China’s Exchange Rate Regime

QUESTION 1: Why do you think the Chinese government historically pegged the value
of the Yuan to the U.S. dollar?
ANSWER 1: Yuan value has been tied to the US currency since 1994. Chinese exports
are becoming more affordable and appealing to those of other countries as a result.
Consumers using foreign currencies can purchase more China exports if a currency peg
keeps the yuan inexpensive than they would be able to if the yuan were more expensive.
Consumers using the US dollar can purchase more Chinese exports if the People's Bank
of China maintains the yuan weak against the greenback. The Peoples Bank of China
makes currency purchases to maintain the yuan's artificially low value and encourage
vigorous export activity. The advantages of fixing the value of the yuan versus the dollar
include greater control over the management of the money supply and exchange rate.

QUESTION 2: Why did the Chinese move to a managed-float system in 2005?


ANSWER 2: The government has adjusted the peg as necessary, including stopping its
appreciation when demand for Chinese commodities fell during the financial crisis. The
renminbi has been using a managed float system since 2005.

QUESTION 3: What are the benefits that China might gain by allowing the yuan to float
freely against other major currencies such as the U.S. dollar and the euro? What are the
risks? What do you think they should do?
ANSWER 3: China may obtain the following advantages by allowing the yuan to float
freely versus other significant currencies like the US dollar and euro:
• If the value of the yuan falls in relation to the dollar, export competitiveness will
increase.
• The country's economy will grow if the yuan gains strength, which has a direct impact
on it.
• If the yuan gains strength, the debt amount will decrease when converted into dollars,
and Chinese businesses will make more money and operate in a better climate.

The following risks come with letting the yuan float freely:
• The economy might shrink.
• If the value of the yuan falls in relation to the dollar, the amount of debt will rise
quickly and may push many Chinese enterprises into bankruptcy.
They have a very effective system in place for managing the value of the yuan, and they
can do so whenever necessary.

QUESTION 4: Is there any evidence that the Chinese kept the level of its currency
artificially low in the past to boost exports? Is China keeping it artificially low today?
ANSWER 4: Yes, the Chinese maintained the value of their currency artificially low in
the past to encourage exports, and the data below indicates that "the yuan was
undervalued to improve the competitiveness of Chinese exports when China started to
open up its economy to global trade and investment in the 1980s." Although they don't
deliberately maintain the value of the yuan low today, they do safeguard it against the
dollar and seem to be attempting to prevent it from falling below 7 yuan to the US
dollar.
QUESTION 5: What policy stance should the United States and the EU adopt toward
China with regard to how it manages the value of its currency?
ANSWER 5: If it turns out that China is not manipulating its currency, the US and EU
should adopt a neutral stance toward China and treat it like any other regular country
rather than seeing it as a trade rival. Reducing unnecessary import tariffs on Chinese
goods and improving relations with China to cooperate in the production and
technology sectors so that both the EU and the US can create goods at lower costs are
additional possible courses of action. Both the US and the EU would gain from improved
bilateral relations with China. However, if the US and EU continue to believe that there
is a problem with the Chinese currency, they may approach the WTO or IMF to resolve
the issue as a whole.

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