Essay about China's Managed Float

745 Words Oct 31st, 2011 3 Pages
Case Study 2: China’s Managed Float

Questions 1. 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? 2. 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? 3. How might a decision to let the yuan float freely affect future foreign direct investment flows into China? 4. Under what circumstances might a decision to let the yuan float freely destabilize the
…show more content…
Most foreign enterprises move their materials into China to use Chinese labor. If they continue, their production costs will rise. However, these enterprises may find selling into China more attractive because the Chinese buying power will increase. 3. 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. 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. Although I do not think the U.S. government does not have the power to push the Chinese to let the yuan float freely, I think it would be beneficial for the U.S. A free-floating yuan will bring about higher exchange rates. American consumers would have to compensate for these exchange rates when paying for everyday goods. This could stimulate the American economy if consumers decide

More about Essay about China's Managed Float

Open Document