China to Float or Not to Float

2631 words 11 pages
Summarize and evaluate the arguments presented in the (A) case for and against the revaluation of the Renminbi. Provide your own assessment of the projected future direction of the RMB/USD exchange rate (using info provided in the case). China’s decision to release its currency from the decade long peg (approx. 8.28 Yuan per USD) raised multiple concerns within the global economic community. Many economists welcomed the decision while still others questioned it. Below is a brief description of the various arguments presented on the topic. Political: With the value of the Dollar decreasing over the recent years, the western governments are less pleased with China maintaining its currency at a fixed rate. The US and EU are of the opinion …show more content…
Technical: China’s rapidly growing economy will find it hard in the near future to keep its money inside. The large share of the country’s reserve tied up in US debt poses a huge threat on the currency. The US market is still picking itself back up from the recent crisis and the tides could turn at any time. Revaluing the Yuan when there is a positive push would be crucial to the economy rather than having to deal with a sudden drop in investment inflow. At the same time, analysts say that had the popular expectation of 20 to 25 percent revaluation been heeded to, it would have had a catastrophic effect on the economy. China should continue to maintain its fixed exchange rate so as not to fall into a downward pressure situation that could result in deflation and ultimately a ‘zero interest’ liquidity trap. Assessment: The Chinese government’s decision to float the currency in 2005 by about 2.1% within a band of 0.3% was a positive step for the global economy. China’s adoption of a crawling peg policy will soon see its self converting into a fully floating exchange rate in a few years as market forces come into play. A floating exchange rate will help counteract the cyclical ups and downs faced by the economy, allowing it to self rectify over time and become more stable. The RMB has the potential to become a strong global currency provided it reduces capital restrictions, allows the private sector to diversify their currency holdings and liberalizes

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