China has quickly emerged as one of the most dominant economic forces of the 20th century. The exponential increases in production have vaulted the Chinese Yuan to the top of the basket of currencies that are currently being traded in the world market. Despite the efforts of Chinese officials to stem the rapid increase of the Yuan’s value over the years, the weakening dollar and the robust Chinese economy have kept the Yuan’s value higher than the economic level. This rapid increase in value over the years has also been the cause for much of the inflation that the Chinese consumers are currently experiencing.
Lately, however, the Yuan has been experiencing a slight decline due to the manipulation of Chinese officials in order to keep China competitive in the Global Market and to stave off any bouts of inflation that will occur. This short discourse will therefore discuss the events following the recent slowdown in the value of the Yuan in the context of China’s position in the global market. The key to understanding the devaluation of the Yuan lies in being able to understand the steps that Chinese Officials have taken to protect the Chinese Currency and economy.
In order to address the previous rise in the value of the Chinese Yuan and the growth of the Chinese economy, Chinese officials have made many attempts to curb this sharp increase of currency value. In 2005, the Yuan declined in value as it dropped the dollar peg that it traditionally had in favor of a basket of currencies. This caused the Yuan to decline in value against the other currencies of the world. These efforts are not effective however as the Yuan still continued to appreciate in value. The reason for the currency control programs that the Chinese are implementing is quite easy to understand.
In order for China to maintain its place at the top of the production chain, it needs to maintain a low currency value versus other currencies. The rationale behind this is that by maintaining an undervalued currency, China is able to export its goods at a lower price thus encouraging the market to purchase more of its goods. This results in the imbalance of trade that most countries are currently experiencing with China. Recent calls for China to increase the value of its currency have remained largely unheeded by Chinese Officials.
Now that the interest of China in keeping an undervalued currency has been explained, a discussion on the recent steps and events must be undertaken so as to provide a better picture of this economic phenomenon. With the American economy entering a recession and the dollar decreasing in value, most currencies that have been pegged against the dollar have also experienced a slight decline in their value. While it may seem like it is a negative effect, the reality is that it is actually a boon for these Asian currencies.
The reason, as explained earlier, is because it now allows these Asian currencies, such as the Yuan, to become more competitive in the global export market. Japan has recently called for China to allow the value of the Yuan to increase in order to counter the trade deficit that it is currently experiencing with China. Calls for China to revalue its currency have been answered by Chinese Officials by dropping the dollar peg that the Yuan traditionally had in favor of a basket of currencies.
This resulted in an increase in the value of the Yuan relative to other currencies and also stimulated the increase in value of other Asian currencies. Despite these reforms and revaluations the Chinese have still tried to artificially decrease the value of the Yuan. The result of these reforms and revaluations can clearly be seen in the value that the Chinese Yuan has in relation to the United States dollar. The effect is that while the Yuan may have increased in value with regard to other currencies it has still remained largely undervalued in relation to the United States Dollar.
On a price adjusted basis, the Chinese Yuan has depreciated by nearly eleven percent (11%). This has resulted in depreciation in export weighted terms as well. All of these moves, however, have not detracted from the fact that China still maintains a large lead in the trade imbalance that the United States is experiencing with China. While there have been calls for the Yuan to increase in value, the increases are too insignificant to cause any real effects in addressing the trade deficit issue.
The strength of the Chinese production economy manages to keep costs low and thus enticing more buyers to consume Chinese products. As more and more dollars enter the Chinese market, the demand for the Yuan increases and while theoretically this is supposed to increase the value of the Chinese Yuan, this is countered by massive government spending by the Chinese government. The infrastructure spending that is done by the Chinese government is increasing the money supply of the Yuan in the market and thus countering any influx of foreign currencies.
As the world struggles to deal with the economic behemoth known as China, the Chinese have their own problems as well. Calls for the Chinese to increase the value of the Yuan, while seemingly addressed, have proven to be ineffective in keeping the value of the Yuan up. The strength of the Chinese economy lies in the production boom that it is currently experiencing and as such the value of the Yuan may no longer really be in the hands of the Chinese Officials.
At this point in time, it is not in the best interests of China to increase the value of the Yuan. The economic boom that China is currently experiencing promises to continue for a long period of time. Talks of shifts in the balance of economic power from the United States to China have done nothing to address this issue. While the Yuan, if pegged at a realistic value, is considerably strong, the continued GDP growth of China can only be sustained if China keeps the Yuan at a low level which it seems to be doing so.
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