China, float or not Essay

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1. What are the implications of China’s exchange rate policy on doing business with and “against” China? Since July 21, 2005, China has adopted a managed floating rate regime based on market supply and demand with reference to a basket of undisclosed currency. The daily trading price of the U.S. dollar against RMB in the foreign exchange market will be allowed to float within a band of +/->0.3% around the central parity published by People’s Bank of China. The signal was initially interpreted by the international market as an indication that China would embark on a gradual shift toward increased flexibility which eventually adopt a floating exchange rate regime where the RMB will appreciate much against US dollar. However, they soon…show more content…
The change in the exchange rate policy to move to a more flexible floating exchange rate system will inevitably compromise China’s current advantageous position in trading especially the export which takes a heavy weight in China’s GDP. The appreciation of RMB will deprive the Chinese enterprises of the advantage to leverage the cheap materials and labor to compete in the international market. This might be a positive indication for China’s importers who has a focus on the domestic markets rather than the international market, where the importers’ purchasing power gets enhanced if the domestic currency appreciate. However, China is still heavily relying on export to grow their GDP at this point and a revaluation of RMB would be very dangerous for the country. Thousands of factories counting on exports might be closed and millions of workers would lose their jobs. As pointed out by Morgan Stanley Economist Andy Xie in the case, “China’s priority is stability and currency flexibility should not be allowed to conflict with this goal”. On the flip side though, a revaluation of the RMB would not necessarily change the current situation of US and EU who had a large trade deficit with China. The reduced imports from China are unlikely to stimulate the growth of the domestic productions of those
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