China's Managed Float Why Do

China's Managed Float Why do you think the Chinese government originally pegged the value of the yuan against the U.S. dollar? What were the benefits for doing this for China? What were the costs? The Chinese government pegged the value of the yuan against the U.S. dollar to help spur economic growth. This occurred in 1994, when they country had completed a series of reforms and was seeking to expand into other markets.

The benefits of this action are: it would help the country be able to build up its capital reserves and it would create a period of unprecedented growth. The costs of this policy are: it appears as if China is seeking to gain at the expense of the rest of the world. Where, they will run high trade surpluses, while their trading partners will have large deficits. Over the course of time, this will create large imbalances in the world economy. (Hill, 2008, pg.

371) Over the last decade many foreign firms have invested in China and used their Chinese factories to produce goods for export. If the yuan is allowed to float freely against the U.S. dollar on the foreign exchange markets and appreciates in value, how might this affect the fortunes of those enterprises? This will cause the overall profits of these companies to increase. The reason why is because they can produce the various goods cheaper in China.

Then, export them to other countries and continue to charge the same mark up. At which point, the profit margins of the company will increase. (Hill, 2008, pg. 371) How might a decision to let the yuan float freely affect future foreign direct investment flows into China? This will mean that many companies will begin focusing on marketing to Chinese consumers. Where, the floating exchange rate will increase imports into China. This will help foreign-based manufacturers to become more competitive at some point in future. (Hill, 2008, pg.

371) Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might the global implications of this be? If the there is outside pressure from Western governments and Chinese trading partners. Where, they will begin to impose tariffs and duties in an effort to force the Chinese to change their policy. This would destabilize the Chinese economy, resulting in a collapse of their export markets.

The global implications would be that this kind of action would result in China retaliating with tariffs and duties of their own, resulting in a worldwide depression. (Hill, 2008, pg. 371) Do you think the U.S. government should push the Chinese to let the yuan float freely? Why? Yes. The reason why, is because the inability of China to let the yuan float freely, is creating imbalances in the global economy. If this is allowed to continue, it could shift economic advantages in favor of China.

As they have large currency reserves at the expense of the rest of the world. Do you.