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Chinas Managed Float Case Study

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Chinas Managed Float Case Study

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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?

I believe that the Chinese government originally pegged the value of the Yuan against the US dollar as an attempt to compete with the U.S. and the rest of the world. The US dollar was the strongest in the global market. The benefits for China were that their yuan would stay weak, and their exports would remain cheap while their economy thrived on production for the U.S. economy. The costs for China were that they had to exchange for U.S. dollars every month and that their exchange was the U.S. deficit. The U.S dollars movement will effect the China’s economy either way.

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?

If the yuan is allowed to float freely against the U.S. dollar on the foreign exchange markets and appreciates the value, foreign enterprises would not benefit when trying to export out of China. Most foreign enterprises move their materials into China to use Chinese labor. If they continue, their production costs will rise. These enterprises may find selling into China more attractive because the Chinese buying power will increase.

3. How might a decision to let the yuan float freely affect future foreign direct investment flows into China?

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...