Introduction of the Case Study:
This case presents the basics of the cash economy and demonstrate the practical applications of monetary policies and exchange rates that are related to business decisions. This study supports the case be a debate about exchange rate policy, China has adopted preceding and following 1978, the year in which economic liberalization took place is great. Considered within the activities of the past two years that have taken place in China over controversial their exchange rate regime by members of China's trading partners. The first objective of this article is to trace the history of the tumult surrounding the Chinese currency, the renminbi (RMB), which literally translates into English as "the currency of the people." Next, we'll discuss the issues of the case. Finally, the case will be made up-to-date with the brief on the current situation surrounding this issue extracts.
background on the case:
In 06, several countries that conducted trade with China strong allegations against the exchange rate policy in China. The main complaint is that the Chinese currency is undervalued and China because of the manipulation of exchange rates to suppress the prices of its exports. Among other effects, these countries, and claimed that this action could cost them thousands of jobs. It threatened the United States, that the deficit was $ 233 billion trade with China in that year to impose tariffs on Chinese imports if China does not revalue its currency. Japan and the newly industrialized economies, such as Taiwan and Singapore, were less vocal, because they have been trying to strengthen economic ties with China. Asian developing countries, however, supported the re-evaluation in order for them to be better equipped to compete with China. It was the only collective group, which has remained relatively mute on the lively discussions that ensued in the media between 05 and 07 from multinational companies. These companies benefited from lower operating costs in China, which, for them, means cheaper land prices and more competitive exports of Chinese-made.
considered the exchange rate in China to be out of synch with the market forces, with many reasons to support this conclusion. First, the Chinese economy grew by 9% annually over the past decade. According to the hypothesis Balassa- Samuelson, accompanied by rapid economic growth by raising the real exchange rate because of the productivity growth difference between the recoverable sectors of trading and non-negotiable. Second, China has become the third largest oil exporter in the world with at least $ 970000000000 in 06. China's exports saw a nearly 30% growth in recent years. Finally, there was a range of $ 1.2 trillion in foreign currency reserves. They claimed these pop-up construction to be the result of manipulation of RMB against the natural forces of the market.
Chinese officials strongly oppose the idea of raising the value of their currencies for several reasons, the most powerful of which is probably the country in which it is heavily dependent on trade and export growth is vital. Second, more than two hundred million rural residents have left their farms to find work in urban centers. Necessary to accommodate these workers in the economy and functional higher economic growth. Apart from the economic reasons against changing the exchange rate policy and officials in China turn to several counter. First, the yuan, according to them, is not undervalued really economic growth in China has something to do with currency manipulation anything. Second, the United States runs a trade and budget a large deficit, which is partly due to capital inflows from China, and we should look to the weakness in the economy before pointing fingers anywhere else. Also, China is a sovereign state has the right to choose their own exchange rate policy. Finally, he drew Chinese officials on a well known fact that in spite of the massive with the United States and Europe, its trade surplus, it also has a large deficit with others, especially Asian countries.
As mentioned in the introduction, China has begun to liberate the country in 1978. Before then, followed by central planning, it was self-reliant economically-sufficiency. The total foreign trade of China's size does not remember, and there were hardly any of the work of foreign companies in China. The yuan, at the time, was linked to a basket of currencies, and the exchange rate system was held at a high level is unrealistic. Currency was practically non-transferable. After 1978, followed by China has opened up an "open door policy" and special economic zones for foreign investment. It emerged small private sector. The devaluation of the yuan in 1981, 1985 and 1993 to the US dollar in order to promote Chinese exports. The revaluation of the yuan by 5% in 1995, and held until July 05.
beganof wrangling in July 05, when China's reform of its exchange rate regime. Yuan has appreciated 2.1% against the dollar. Has been replaced by the dollar peg by peg to a basket of currencies with a fluctuation band permitted 0.3% against the dollar each day. Dominated basket of the US dollar and the euro and the yen. It has been chosen currency baskets and weights on the basis of trade conducted with China partners, and sources of foreign direct investment ( "FDI") and the formation of China's debt. In May 07, China's central bank announced to expand the daily volatility of the yuan against the dollar to 0.5%. This came in the wake of the rise of its currency by 7.2% against the dollar.
Chinese officials, the site of many alternatives that can be taken in place of raising the value of their currencies. The first proposal is to reform the banking sector, where up to 40% of the loans are weak and nine out of ten state-owned banks performance. Second, the policy of "go abroad", and encourage Chinese companies have proposed to invest abroad, thus stimulating FDI. Finally, Chinese officials have suggested the imposition of voluntary export tax. Unlike with the revaluation, the tax will not affect the value of foreign currencies. Moreover, the Chinese government has a lot of tax revenue needed.
analyze and discuss issues of the case:
Now this article we will discuss the responses to the questions from the same case. The first two questions are concerned with the extent of the case much further China should let its currency rise and determine whether or not undervalued it up to the time of writing this article. First, China should never let the currency fall to this extent. It contains the source of the abundance of cheap and skilled labor, with a high overall level of educational attainment, and does not need to manipulate their currencies in order to benefit from strong exports. However, this is exactly the work of Chinese officials took. This must be corrected immediately before you have more trading partners suffering. Regarding the second question, it is clear from the evidence that the currency was undervalued. Due to the high level of foreign direct investment entering China's large trade surplus with, should the yuan appreciates relative to the basket of goods, especially the US dollar and the euro both weakened recently.
concernedfollowing questions with the consequent revaluation of China's trading partners and whether it should be any profound reform gradually or not. Also, ask for the case study how floating yuan will affect the exchange rate. In simple terms, the lifting of the value of most trading partners benefit comes at great cost to China. And business partners, including the United States and the euro area benefit by not losing thousands of workers to the Chinese market, as was the case when local companies moved to China under favorable economic considerations. Asian developing countries will be more able to compete with Chinese exports if the revaluation takes place. Multinational companies did not favor such a move, and maintain the status quo allows them to continue to take advantage of lower operating costs in China. China lose the sense that the economy will fall. It can be said, however, that this will happen anyway, given the current situation in the global economy. He pointed newspapers and business magazines and political current to the fact that Europe is now in a recession, and that the United States is not far behind. The credit crunch has not affected China this year is expected to decrease only about 8% in 09, according to analysts in the economy and the Financial Times economic growth.
and as I mentioned before, China is heavily dependent on trade and export growth is vital. Revaluation to the erosion of its competitive position. This is also likely to have a negative effect on the labor market, which may be less jobs available in cities for those leaving rural communities and entering urban areas.
to answer the second question, it should be a revaluation gradually in order to give market forces a chance to respond intelligently to the change correctly and the affected components to adjust business practices accordingly. In response to the last question, the lead float of the yuan to strengthen relative to the other basket of exchange rates because they are undervalued now because of market manipulation on behalf of the Chinese officials.
two questions refers to the difference in exchange rates and ask which one is most suitable for China. There are six major exchange rate systems. The first is the exchange arrangement with no separate legal tender system. In this system, the currency of another country are distributed as the only legal tender, or the member belongs to a monetary union or currency that is legal tender himself sharing by the union members. Adoption of this system means complete surrender to the control of independent monetary authorities around the local monetary policy. The second system is called currency board arrangements. This is a monetary system based on a legislative explicit commitment to exchange the local currency into foreign currency at an exchange rate fixed particular, along with restrictions on the issuing authority to ensure the fulfillment of its legal obligations. It may allow some flexibility, depending on how stringent banking rules of the currency board arrangements are. The third system is a conventional fixed peg arrangement other.
states that adopt this system pegs its currency at a fixed rate for other currency or basket of currencies. The formation of a basket of major trading currencies or financial partners and weights reflect the geographical distribution of trade, services and capital flows. There is a limited degree of discretion for monetary policy, depending on the bandwidth.
China has adopted a fourth exchange rate regime in its monetary policy, which is known as linkage crawling system. Preserving the currency within the band around the central rate, which is periodically adjusted at a steady pace or in response to changes in selective quantitative indicators. To maintain the exchange rate within imposes restrictions on monetary policy, with the degree of independence of politics being a function of bandwidth.
V system is managed floating with no predetermined path for the exchange rate. The monetary authority is trying to influence the exchange rate without the presence of a specific exchange rate target or path. Finally, there is a separate flotation system, which has been certified by the United States and the exchange rate determined by the market, with no interference of official foreign exchange, which aims to reduce the rate of change and prevent the light of fluctuations in the foreign exchange market, not to create a level for it. This is the system that the Chinese government must be followed because it is determined by the market and not susceptible to manipulation, while maintaining flexibility with regard to monetary policy.
views of the third party on the issues of the case:
This last section and discuss the current situation regarding this debate. According to the latest news articles from sources such as Bloomberg, the Wall Street Journal and the Financial Times, the Chinese economy has been weak exports due to the housing slump in the United States and the global credit crunch. It is also expected to slow down GDP growth for China. The Chinese government has options to stimulate the economy and protect exporters. It is reported that officials of the Chinese central bank's plan to slow down the appreciation of the yuan. In fact, this is a decision that should have been made a long time ago and will be a major breakthrough in the ongoing discussions, which may actually reach a conclusion given the current state of the global economy.
According to Professor Pan Yingli of the Shanghai Jiao Tong University, and undervalued the yuan since the Asian crisis in 1997, and used this policy of foreign exchange to finance exports and imports sectors on non-trading industries account. Basically, the system crawling linking China adopted allows them to manipulate the exchange rate in their favor in order to sell more products abroad, with exports are the lifeblood of the Chinese economy.
involves the Asian financial crisis four key problems or issues: (1) a shortage of foreign exchange which caused the currency and the value of the shares in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, (2) developed sufficiently sectors and financial mechanisms for the allocation of capital in the troubled Asian economies, (3) the effects of the crisis on both the United States and the world, and (4) the role, operations, and the renewal of the international Monetary Fund money.
Concluding observations:
In conclusion, this case showed how trading partners can be both positively and negatively economic decisions by one or more of the players affected. It is important for countries to recognize that we live in an increasingly interconnected global environment, which does not take important decisions in isolation. In fact, China's decision to continue the reform of the exchange rate has, for better or worse, so much the impact of billions of people all over the world both developed and developing.
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