Based on the discussion in this chapter update the controver

Based on the discussion in this chapter, update the controversy over the value of the Chinese yuan
in foreign currency markets. Is China still using central bank foreign exchange policy to maintain
the value of the yuan? What is the current policy of the United States on this issue?

Book for the class is Economics for Mangers, 3rd Edition by Paul Famham

Solution

U.S. lawmakers cite China as a currency manipulator and the move of the Congress to force the pace of China’s currency reform may only strengthen China’s resolve to take its own time to amend its currency policy. The most likely outcome is one of gradual appreciation of the yuan accompanied by measured dismantling of currency controls before China moves to a freely convertible currency. A substantial revaluation of the yuan would render Chinese exports totally uncompetitive. A criticism of China’s currency policy is that the low yuan encourages over-investment in China’s export manufacturing sector at the expense of domestic market, and the undervalued currency makes imports into China more expensive and out of reach of the ordinary citizen.

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China’s central authorities have intervened and that has left finger prints all of over the money market. In buying dollars to weaken the currency, the monetary authorities put additional money into circulation. The central bank withdrew a fraction of this extra money by selling securities to the bank. This pushed down interbank interest rates, despite the central bank’s withdrawal.

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China’s intervention to limit the appreciation of its currency, the renminbi (RMB) against the dollar and other currencies has become a major source of tension with many of its trading partners, especially the United States. Analysts argue that China deliberately manipulates its currency to gain unfair trade advantages. China’s undervalued currency has been a major factor in the large annual U.S. trade deficits with China and has contributed to widespread job losses in the U.S. President Obama has stated that China should go ahead and move towards a market-based system for their currency. Most agree that greater currency flexibility by China would be one of several reforms that would help reduce global imbalances.

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