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China to Float or Not to Float

In: Business and Management

Submitted By shrumatt89
Words 2640
Pages 11
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 that the quasi-fixed exchange rate gives China a competitive advantage, creating a strain on their import surplus and thereby increasing their trade deficit with China. As of 2005, China’s exports and imports to and from the U.S was $86.9 and $27.6 Billion USD. Members of the US congress have threatened to impose tariffs against China if they do not agree to a revaluation. Allowing the Yuan to float would result in an increase in price of Chinese exports to the US and a decline in the price of US imports into China, hence narrowing their trade deficit. On the other hand, analysts argued that the increase in Yuan’s value between 94-01 was not an absolute result of inflation differentials between China and its trade partners. The large increase in exports over those years could be matched by increased imports. Moreover, it was noted that even post revaluation in 2005, the value of RMB non-deliverable forward (NDF) contracts showed only an expected growth of 5% per annum. Economic: One of the key ways in which China ‘fixes’ or maintains its currency to the US Dollar is by converting its FDI (cumulative total balance of $564 billion in…...

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