China: to Float or Not to Float

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CHINA: TO FLOAT OR NOT TO FLOAT

Question 1: What are the implications of China’s exchange rate policy on doing business with and “against” China?
Figure 1. China’s exchange rate in government manipulation and expectation 2004-2009 The fact that China made two renminbi (RMB, also called yuan) revaluation in 2005 and 2010, but in the limit of case study, we may just focus on the first one as shown in Fig. 1. On July 21, 2005, China announced a 2.1 percent appreciation of the RMB against the US dollar, from 8.28 to 8.11, a move to a managed float, and a number of other “reforms” such as in agricultural, state-owned enterprise, banking sector and trade reform, etc. Those were already mentioned in the case, as Prof required, we don’t repeat any more. The effects of China’s exchange rate are a prominent topic in both policy debate and analytical discussion. In policy circles, the questions include whether China should allow its currency to depreciation – that is, a change in Chinese currency policy would have a significant impact on growth of U.S. output and employment. As we know, China exports a wide range of final goods. Similarly, China is increasingly important as a source of parts and components for manufacturing in other countries. •Depreciation Reduced Imports

A country’s exchange rate cannot be a concern for it alone, since it must also affect its trading partners. But this is particularly true for big economies. So, whether China likes it or not, its heavily managing exchange rate regime is a legitimate concern of its trading partners. Whenever RMB was kept at such low rate, the U.S. companies still faced to the big barriers to entrance to the biggest market of the world. •Depreciation Reduced Investment Abroad

Besides, depreciation also reduced investment abroad especially in developing countries such as Vietnam, Lao, Myanmar, etc. The China companies had to consider more whether they go to invest in low labor cost countries with more risks or...
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