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China and the Yuan

In: Business and Management

Submitted By jasonlow
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China and the Yuan-Dollar Exchange Rate
Q1) How credible was China’s announcement to let the yuan float?

Chinese Yuan/US Dollar Exchange Rate Index, July 2005-Nov 2011

Chinese government has declared its intention to let the yuan float on 19th June of 2010, and this will most likely result in the Yuan to appreciate as the Yuan is under-valued. This reform was of the Renminbi (RMB) exchange rate regime was to enhance its exchange rate flexibility. This announcement may seems dubious because China has long adopted a fixed exchange rate regime since 1994 in which the Chinese government has maintained a policy of intervening in currency markets to limit or halt the appreciation of its currency, the RMB, against the U.S. dollar and other currencies. Known as the world’s manufacturing factory, keeping such a policy will definitely make its exports relatively and comparably cheaper to other countries, especially United States. Similarly, this will also make U.S. exports to China much more expensive, than would occur under free market conditions. As such, if China allows its yuan to float and appreciate, it may lose its competitive position as it may suffer a loss in sales of its exports due to its goods being relatively more expensive to foreign buyers.
China’s announcement to let its yuan appreciate was credible because earlier on, the yuan actually appreciated 17.5 percent the U.S. dollar between July 21 2005 to July 21, 2008. In July 21, 2008 China has stopped its Yuan appreciation. It cited economic weakness due to the impacts of a rising Yuan which has resulted in the loss of jobs in its manufacturing and export sectors. On June 19, 2010 China announced that it would once again begin appreciating the yuan against the dollar. This move was taken by the Chinese government may be largely because of these two main reasons:
1. Significant pressure such as imposing...

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