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2 views

Topic 8

Uploaded by

Kelly Joyce Abrigar Cruz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Why is the Chinese government so hesitant to open up the yuan to market forces

to determine its value inside and outside of China?

Since 1994, the Chinese yuan has been pegged to the US dollar. This strategy keeps
the yuan's value low in comparison to other countries. The effect on trade is that
Chinese exports are cheaper and thus more appealing when compared to those of
other countries. China ensures its economic growth by encouraging the worldwide
marketplace to buy its goods.

China also has domestic problems such as inflation, labor rights, and excessive interest
rates. The Chinese government is concerned that exposing the Yuan to market forces
may reveal these issues to the worldwide community, thereby harming the Chinese
economy.

The yuan is close to, if not somewhat greater than, its long-run average based on the
real effective exchange rate (REER), which assesses a currency's value weighted
against those of its major trading partners after correcting for inflation.

"One yardstick is the actual effective exchange rate, and by that metric, the yuan is
reasonably valued at the moment," said Julian Evans-Pritchard, senior China economist
at Capital Economics in Singapore.

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