China to Float or Not Float

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How is China’s exchange rate policy linked to its development strategy? How would changes in exchange rate policy impact growth in China as well as the rest of the world? Is the current exchange rate policy sustainable in the long run?

China’s Policy is to attain a sustainable growth, by integrating more and more with world economy or in other words to become a rich economy, while generating employment to cater the growing workforce surplus in the country.

It the current economic scenario exports play a major role in this policy as they constitute 40% of its GDP. Thus keeping exchange rate fixed it terms of USD helps to decrease the exchange rate volatility which in turns makes china an attractive target for importers, more since the strategy keeps exchange rate lower exports from china become cheaper. As a result of increased exports china is able to maintain a huge current account trade surplus which is fueling further growth of economy and is also playing a crucial role in keeping up with the strategy of keeping lower exchange rate.

The fixed lower exchange rate has also been successful in generating large amounts of FDI inflows, which has generated great employment opportunities and also resulting knowledge transfer has led to increased productivity, as a result of this strategy, the productive sectors of the major world economies have been facing increasing competition from Chinese products.

However if this exchange rate policy changes to a floating policy and the Yuan appreciates, the result will be increase in imports, as local products will be perceived as comparatively expensive, and a decrease of exports. As an overall effect surplus will start to decrease and may even become deficit depending on how drastic the appreciation will be, a stronger Yuan would also reduce economic growth and increase unemployment. Another effect will be withdrawal of FDI which was a result lower exchange rates and low volatility, all of this FDI will try to...
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