international business

The Chinese government originally pegged the value of the yuan against the U.S. dollar in an attempt to compete with the U.S. and the rest of the world. Because China is an export driven economy, the government thought exports would be less expensive with the pegged value of the yuan. This is a possible benefit of pegging the value of the yuan against the U.S. dollar or any other foreign currency. Therefore, the pegged exchange rate undervalued the yuan by as much as 40%. This fueled a boom in Chinese exports to the West, especially the United States. The Chinese exports are made from imported materials, so by pegging the value twith the pegged value of the yuan. This is a possible benefit of pegging the value of the yuan against the U.S. dollar or any other foreign currency. Therefore, the pegged exchange rate undervalued the yuan by as much as 40%. This fueled a boom in Chinese exports to the West, especially the United States. The Chinese exports are made from imported materials, so by pegging the value to the dollar, China controls its risk when it comes to foreign exchange. A cost of pegging the value is that the U.S. dollar’s movement will affect the Chinese economy either way.
2. If the yuan is allowed to float freely against the U.S. dollar on the foreign exchange markets and appreciates the value, foreign enterprises would not benefit when trying to export out of China. Most foreign enterprises move their materials into China to use Chinese labor. If they continue, their production costs will rise. However, these enterprises may find selling into China more attractive because the Chinese buying power will increase.
3. Letting the yuan float freely could increase direct investment flows into China. A free flowing yuan makes China richer. This will boost the Chinese economy and make the Chinese people’s buying power higher. Because of this higher buying power, foreign investors will look to take advantage of the growing Chinese economy. Therefore, foreign