Chinas Managed Float free essay sample

The  RMB  is  unlikely  to  be  floated  freely  in  the  near  term  as  the  countrys  economyfaces  internal  difficulties  during  its  reform  drive  and  external  uncertainties  of  the  globaleconomy,  the  report  quoted  Xia  Bin,  a  member  of  the  monetary  policy  committee  of  thePeoples  Bank  of  China  (PBOC),  or  the  central  bank,  as  saying. To  create  a  relatively  stable  exchange  rate  formation  environment,  the  governmenthas  to  gradually  open  its  capital  market,  so  the  RMB  can  not  go  global  too  soon,China  moved  to  shift  from  a  conventional  dollar  peg  system  to  a  managed  floatingexchange  rate  system  in  2005,  which  means  the  central  bank  now  does  not  link  theyuan  only  to  the  U. S. dollar. Chinas  RMB  go  global  drive  requires  totally  free  exchange  of  the  yuan,  which  meansthe  regulation  of  capital  accounts  should  be  fully  opened,  and  that  exchange  rates  willbe  largely  determined  by  the  demand  and  supply  in  both  domestic  and  global  markets. But  the  country  can  not  handle  this  at  its  current  stage  of  economic  development,  Xiasaid. Xia  suggested  that  the  government  should  well  coordinate  policies  concerning  theexchange  rate,  capital  management  and  reform  while  matching  the  reform  of  itsexchange  rate  policy  with  that  of  capital  management  during  the  RMBs  regionalizationprocess. Chinas Managed Float free essay sample Why do you think the Chinese government originally pegged the value of the Yuan against the U. S. dollar? What were the benefits of doing this for China? What were the costs? I believe that the Chinese government originally pegged the value of the Yuan against the US dollar as an attempt to compete with the U. S. and the rest of the world. The US dollar was the strongest in the global market. The benefits for China were that their yuan would stay weak, and their exports would remain cheap while their economy thrived on production for the U. S. economy. The costs for China were that they had to exchange for U. S. dollars every month and that their exchange was the U. S. deficit. The U. S dollars movement will effect the China’s economy either way. 2. Over the last decade, many foreign firms have invested in China and used their Chinese factories to produce goods for export. We will write a custom essay sample on Chinas Managed Float or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 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? If the yuan is allowed to float freely against the U. S. ollar on the foreign exchange markets and appreciates the value, foreign enterprises would not benefit when trying to export out of China. Most foreign enterprises move their materials into China to use Chinese labor. If they continue, their production costs will rise. These enterprises may find selling into China more attractive because the Chinese buying power will increase. 3. How might a decision to let the yuan float freely affect future foreign direct investment flows into China? Letting the yuan float freely could increase direct investment flows into China. A free flowing yuan makes China richer. This will boost the Chinese economy and make the Chinese people’s buying power higher. Because of this higher buying power, foreign investors will look to take advantage of the growing Chinese economy. Therefore, foreign direct investments will increase. 4. Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might he global implications of this be? The decision to let the yuan float freely could destabilize the Chinese economy because of inflation. With the increased value of the yuan, the Chinese economy may slow because there will be less cheap materials imported into Chinese manufacturers. This would make Chinese goods more expensive. Globally, however, this could be an opportunity for foreign producers to sell in China. 5. Do you think the U. S. government should push the Chinese to let the yuan float freely? Why? No, the U. S. government would only be harming their economy. It would create more jobs for Americans, but, the cost of labor would be higher and that would translate over to the final product’s retail prices being higher. . What do you think the Chinese government should do? Let the yuan float, maintain the peg, or change the peg in some way? I think it would be a good idea for the Chinese government to maintain the peg. The yuan would still maintain a pretty low value, keeping their economy thriving. Maintaining the peg would also allow for the other world currencies to compete with the yuan. The Chinese government should look out for what is best for its own economy and keep the yuan pegged and cheap.