China Managed Float
Case study 2
China’s managed float
Summary
During the year 1994, China pegged its currency, Yuan to US dollar at an exchange rate of $1=8.28 Yuan. The exchange rate policy was implemented to prevent balance of payment crisis and US is considered as one of the most influential currency in the global market. By this method, China gain rapid economic growth and foreign capital inflows. The stable and lesser risk have attracted many foreign company to invest in china as they can plan and make decision ahead. The undervalued Yuan have helped China to become one of the largest manufacturing industries in the whole world. Their low cost productions have made China favorable for foreign company to produce goods for export.
However, due to excessive buying and selling of US dollar, US is suffering from an increasing trade deficit. The manufacturing companies in US cannot compete with Chinese imports due to the relatively low product cost. Many of them become jobless. The US government tried to persuade China into using a more flexible exchange rate policy to increase the Yuan currency.
In year 2005, the china government finally bowed to the pressure and they have taken a more flexible exchange rate policy. The Yuan was allowed to move at a certain percentage each day against other currencies. The US government will place a higher tariff on Chinese imports if they are not depreciated further against the dollar.
Question 1
Why do you think the Chinese government originally pegged the value of the Yuan against the U.S. dollar? What were the benefits of doing this for China? What were the costs?
The Chinese government pegged the Yuan currency against the U.S to control the value of its currency. By doing so, China keeps its Yuan value lower than the U.S. value. Furthermore, China originally pegged its Yuan value against U.S. as the U.S. dollar is considered as highly reliable financial instrument in the global market. In order for the country to become an export
China’s managed float
Summary
During the year 1994, China pegged its currency, Yuan to US dollar at an exchange rate of $1=8.28 Yuan. The exchange rate policy was implemented to prevent balance of payment crisis and US is considered as one of the most influential currency in the global market. By this method, China gain rapid economic growth and foreign capital inflows. The stable and lesser risk have attracted many foreign company to invest in china as they can plan and make decision ahead. The undervalued Yuan have helped China to become one of the largest manufacturing industries in the whole world. Their low cost productions have made China favorable for foreign company to produce goods for export.
However, due to excessive buying and selling of US dollar, US is suffering from an increasing trade deficit. The manufacturing companies in US cannot compete with Chinese imports due to the relatively low product cost. Many of them become jobless. The US government tried to persuade China into using a more flexible exchange rate policy to increase the Yuan currency.
In year 2005, the china government finally bowed to the pressure and they have taken a more flexible exchange rate policy. The Yuan was allowed to move at a certain percentage each day against other currencies. The US government will place a higher tariff on Chinese imports if they are not depreciated further against the dollar.
Question 1
Why do you think the Chinese government originally pegged the value of the Yuan against the U.S. dollar? What were the benefits of doing this for China? What were the costs?
The Chinese government pegged the Yuan currency against the U.S to control the value of its currency. By doing so, China keeps its Yuan value lower than the U.S. value. Furthermore, China originally pegged its Yuan value against U.S. as the U.S. dollar is considered as highly reliable financial instrument in the global market. In order for the country to become an export
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