8/19/2019 China to Float or Not to Float

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Ques 1) What are the implications of China’s exchange rate policy on doing business with

and “against” China?

nswer)  For a considerable span of time, China's currency was undervalued. Numerous

examiners and financial specialists assessed that the Chinese currency (Yuan) was undervalued

 by !". #lon$ these lines, for a considerable len$th of time, China %ept a hi$her exchan$e rate.

&y doin$ so, China has some advanta$es but also some disadvanta$es.

Firstly, by undervaluin$ its currency, China %eeps the Yuan as wea% currency, (since you reuire

more Yuan to purchase a .. dollar). &y doin$ that, China could %eep an upper hand over 

different nations, for example, *he .. *heir products were sold at a less expensive price

contrasted with the .. products. +any analysts and economists also pointed out that lar$e

increases in exports, which some observers attributed to the undervalued currency, were matched

 by lar$e increases in imports. *hus, the &alance of ayment is with lesser errors and omissions.

&e that as it may, re$ardless of the possibility that there are points of interest, there are li%ewise

wea%nesses to have a hi$h exchan$e rate. &y havin$ undervalued currency, importations turn out

to be truly costly. -n fact, by havin$ a hi$h exchan$e rate, because of the cost of importations, the

deficit of China is li%ewise increasin$. Considerin$ Chinas hu$e and $rowin$ income

ineualities, and its massive dis$uised rural unemployment, it is easy to ima$ine a period of 

 political instability that sends investors headin$ for the exit. #lso, Chinas investment demand

has been very stron$ for several years, so they are now tryin$ to slow down investment to some

extent and enhance the household consumption demand to improve the economic structure.

#lthou$h, exchan$e rate policy does wor% to some extent to achieve a more balanced economic

structure, however domestic demand policy is more important than the exchan$e rate.

#fter a few calls, the /0st of 1uly /22!, China revalued its exchan$e rate from 3./3 Yuan for 

every .. dollar to 3.00 Yuan for every . dollar.