The Chinese Yuan Debate (Essay Sample)
1. How might China\'s concerns of a Yuan appreciation be Alleviated? 2. Currently the Yuan is not a convertible currency, meaning that the Chinese individuals are not permitted to exchange their Yuan for dollars to invest abroad. Moreover, companies operating in China must convert all their foreign exchange earnings into Yuan. Suppose China were to relax these currency controls and restraints on capital outflows. WHAT WOULD HAPPEN TO THE PRESSURE ON THE YUAN TO REVALUE? Explainsource..
The Chinese Yuan Debate
(January 04, 2014)
The Chinese Yuan Debate
Chinese Yuan (Renminbi) ties with the United States dollar over the decades, China has been concerned with the appreciation of the currency through controls. Currency appreciation identifies with increase in value of Yuan in respect to the United States dollars, which is the reference currency in this context, an indication that China expects to buy United States dollars at a lower rate, an example of appreciation is 1 Yuan = 0.17 USD, appreciation pushes the exchange rate at 1 Yuan = 0.2 USD. In this context, once the Chinese Yuan appreciates, then the United States dollar will be considered as less competitive as compared to the Chinese Yuan.
Appreciation of Yuan
Alleviating the concerns of the Chinese Yuan will be facilitated through increasing the demand of the currency in the global market (Chinaglobaltrade.com., 2012). This will be facilitated by increasing the value of the Chinese Yuan in the world markets. There are different ways of alleviating the Chinese Yuan, the first model is through increasing the exports of the goods and services, in so doing, international business networks will need Chinese Yuan in paying for the exports to different nations (Fingleton, 2013).
The second model of appreciating the Chinese Yuan is through the Chinese central bank increasing the interest rates. High interest rates will encourage individuals and investors in China to deposit their savings with the local banks with the intention of earning interest rates that are higher (Karmin, 2009).
The third model of appreciating the Chinese Yuan is through increasing the Chinese employment and per capital income; in so doing, the demand for the goods and services will go up, which will facilitate more demand for the Chinese Yuan in the local market (Fingleton, 2013). China will manage alleviating the value of the Chinese Yuan through increasing the demand of the Chinese Yuan in the international markets, which is characterized by the foreign exchange market.
Convertibility of Yuan and Currency Controls and
Restraints on Capital Outflows
Surveys have indicated that the Chinese Yuan in currently not convertible with the United States dollars among other currencies. China as a way of alleviating the Chinese Yuan does not permit the exchange of the Chinese Yuan in preference for dollars for investors seeking to invest outside China (Khanacademy.org., 2013). China has set rules governing companies operating in China, that the companies must convert all foreign currencies in preference of the Yuan (Karmin, 2009). In so doing, the Chinese Yuan has been stable in the international markets, and so some extent has encouraged appreciation of the Chinese currency.
Surveys indicated that if China relaxes on currency restraints and controls on capital outflows, it could result to lost value on the part of the Chinese Yuan. It has been noted that most companies in the world prefer operating through United States dollars as a reference currency (Zhang, 2013). China forces its business counterparts to use Chinese Yuan as the reference currency in the region. If China relaxes on the currency restraints and controls, then there are high chances that United States dollars will influx in the Chinese market, a model that will lead to a depreciation of the Chinese Yuan (Fingleton, 2013). Chinese government currency restraints and controls are geared at protecting the value of the Chinese Yuan both in the local market and in the international market.
The economic rise of China is dated back to the 1980s, when China opened up its doors to the economic relations and also to international trade. Deng Xiaoping is the reformist leader who initiated the current economic boom in China. The quasi-capitalist venture has improved with time hence positioning China strategically in the global trade (Chinaglobaltrade.com., 2012). Surveys indicated that the improvement of the Chinese economy has partly been contributed by China pegging the Yuan to the United States dollar. The pegging of the currencies was followed by policies that have facilitated international trade between the United States and China (Karmin, 2009).
Trade between the United States and China dates back to 1985, the trade has been going stronger and stronger with time. Pegging Yuan with the United States dollar has significantly influenced the economy of China, with the China exporting more than one third of its exports to the United States. Pegging of Yuan to the United States dollar has benefitted Chinese businesses involved in the exportation business, and to some extent discouraged importation businesses (Karmin, 2009). Pegging of Yuan to the United States dollar increased the level of confidence on the investors while using Yuan. If the currency restrictions and constrains are eliminated, then the economic growth of the China would drastically fall, as compared to other nations doing the exportation business.
It can be argued that the currency restrictions and constraints on Yuan has increased the economic ties of the Chinese economy with the external world, and this has facilitated fast rise in the Chinese economy as compared to other parts of the world (Zhang & Chan, 2011). It has been noted that Chinese Yuan is not priced in reference to the interest rates. Chinese government argues that interest rate is not part of the monetary tool in that region; this is unlike other nations of the world that consider interest rates as an economic tool (Fingleton, 2013). The trading of the Chinese Yuan is based on the reserve requirements of the banks in China. Interest rates in China is not an effective tool, hence does not influence appreciation or depreciation of the Chinese Yuan. Interest rate does not influence the free float of the Chinese Yuan in the open market (Khanacademy.org., 2013).
Chinese government hold the price of Yuan steadily under the fixed exchange rate. It has been noted that increments in the reserve requirements results to reduction in the amount of the Yuan currency circulating in the economy; decreasing the reserve requirements results in increments in the amount of Yuan currency that is circulating in the economy (Minikin & Lau, 2013). The relationship between Yuan and United States dollars is complex; surveys have indicated that United States dollars is strategically located in the global market, and that United States dollar is considered as standard of currency measurements in the world (Zhang, 2013).
Pegging the Chinese Yuan to the United States dollars in part has benefitted China more than the United States. Surveys have indicated that United States manufacturers in a number of occasions have challenged the congress, to negotiate with China on appreciating the Yuan currency. United States manufacturers indicated that competing with the Chinese products and services has been difficult, since they are cheap and that many people end up purchasing the Chinese products and services (Karmin, 2009).
United States Congress has been developing bills that lobby the Chinese government in appreciating the Yuan currency, scholars argues that lobbying in appreciation of the Yuan currency is to make Yuan and dollar more balanced a model that will benefit United States more than the Chinese exporters. Scholars argue that the United States is paying the price of protecting the Chinese superiority in trade. If China relaxes on the currency restraints and controls, then the superiority of the Chinese businesses would collapse to the advantage of the United States among other nations (Zhang, 2013).
Chinese government argues that appreciating the Yuan currency would translate to reduced foreign investment in the nation, lower wages for the employees, increased unemployment and also resulting in deflation (Zhang & Chan, 2011). It...
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