Determine the floating exchange rate

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Reference no: EM131268853

With the heavy focus on trade with China, it may be surprising to discover that Canada is the USA’s largest trading partner. Perhaps it is not the amount of trade between the US and China that is such a great concern as much as the growth of the trade, the corresponding imbalances and China’s currency valuations.

The yuan renminbi is the official currency of China. It has been historically fixed and controlled by the Chinese government, but that may be changing. As China becomes a greater global exporter and economic powerhouse, critics are claiming that the currency is being undervalued and manipulated in an attempt to protect domestic markets. There are additional levels of complexity impacting China as the nation must deal not only with economic competition, but also internal political and social pressures. As China continues to loosen capital controls, there is fear that the government may lose control of inflation and interest rates, thereby causing a great deal of labor and social unrest, while negatively impacting China’s competitive advantages. There are currently platforms in place to increase the circulation of the yuan, but those platforms are currently limited and severely restricted.

1: China is a leader in international world trade, a major exporter, and currently holds the largest foreign exchange reserve in the world. The nation has one of the highest GDPs in the world, and is increasing its economic power. Is it fair for China to fix its currency by undervaluing it on the market? How does keeping its exchange rate undervalued give it a favorable position in international trade? What about from the viewpoint of consumers?

2: Why is the Chinese government hesitant to open the yuan to market forces to determine its value (floating exchange rate) inside and outside of China?

3: We often talk about manufacturing and goods related trade with China. What information can you find on trade in services between the two countries?

Reference no: EM131268853

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