China: to Float or Not to Float

1920 words 8 pages
China: To Float or Not To Float?
International Finance

1 - What are the implications of China’s exchange rate policy on doing business with and “against” China?

For years, China’s currency was undervalued. Many analysts and economists estimated that the Chinese currency (Yuan) was undervalued by 35%. So, for years, China kept a higher exchange rate.
By doing so, China has some advantages but also some disadvantages.
First, by undervaluing its currency, China keeps the Yuan as a weak currency, (because you need more Yuan to buy a US dollar). By doing that, China was able to keep a competitive advantage over other countries such as the US. Their products were sold for a cheaper price compared to the US products.
But even if there
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trade and create more jobs because other low-wage countries might easily take China's place.
• If China depreciates its Yuan:
This would be good for Chinese companies dependent on exports, as the cheaper the currency, the bigger is the advantage for exporters. Foreign factories will outsource their manufacturing and production in China, which will help developed economies to reduce costs and enjoy better profit margins. But in the meantime, it would increase the idea of an unfair competitive advantage in trade for China and unemployment in developed countries might increase. Moreover, inflation in the country would increase, reducing the purchasing power of its citizens even further. Citizens with debts won’t be able to pay them out, as the value of their holdings will decrease.
• If China keep the Yuan stable:
It will give China some stability, which should be its main objective. China is already facing important challenges such as industrialization and urbanization economy, the country could not tolerate substantial currency volatility. But for the rest of the world, the problem will still be the same: unfair competitive advantage in trades and a strong feeling on the fact that by proposing low cost labour, China undercuts other counties’ workers.

So, would this strategy of keeping the value of its currency closely in line with the U.S dollar be sustainable in the long run?

This strategy enabled China to quickly grow and expand on the

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