China Fixed Exchange Rate Case Study

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China’s exchange rate is being controlled by the People’s Bank of China (PBoC: China’s central bank).PBoc manage the value of the yuan. PBoc fixed the USD/CNY rate on trading. This is the exchange rate applies to trade in and out of the china. The reasons for China to use the fixed exchange rate because keep the low value of the currency versus its trade partners. These make China’s export cheaper, and thus more attractive. China believes fixed exchange rate policy can achieve to sustain a high growth rate. The exchange of yuan manage in low, the China has a large degree on export. Fixed change rate eliminates part of the exchange rate uncertainty for Chinese exporters and importers and their trading partners.
The fixed change rate creates
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Reduced risk in international trade which means by maintaining a fixed rate, buyers and sellers between different country can agree on a price and not stand on the risk of later changes in exchange rate before the contracts are settled. This greater certainty would encourage investment. For example if China’s exporter is exporting to the US, a rapid appreciation in yuan would make its exports uncompetitive and the business and trading gone. In the discussion part has state that China keeps its currency low to be more competitive. If US import from China, a devaluation of US dollars would increase the cost of imports and reduce the profitability. Keep the inflation Low. Governments who allow their exchange ate to devalue may cause inflationary pressure to occur. This is because inflation increase, the import will increase because the import good are cheaper, demand of foreign currency increase, supply of domestic currency increase cause the domestic currency decrease. The fixed changed rate will not cause this problem because Country needs to purchase @ sell foreign currency to ensure that the ER does not move above @ below the official ER. However, there are also the expectations which state in the discussion if China counters and upward pressure on the currency will cause the
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