China : To Float Or Not To Float

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Case #1 China : To Float or Not To Float ? International Finance EXECUTIVE SUMMARY Since the second half of the 1980’s, China’s exchange rate policy has aimed at both protecting its market economy and ensuring its progressive development and opening to globalization. At the end of the 1990’s, the country decided not to devalue its currency and avoided a series of competitive devaluations among the Asian economies. At the time, China was lauded by the international community for this decision. However, the future of the Yuan policy later became a popular topic, with many experts agreeing on the fact that it would be necessary to revaluate it in order to play fair with its commercial partners or to simply let the market play his role through a floating exchange rate. The following document: * Shows the advantages and disadvantages of China’s current exchange rate system, namely it gives its economy a competitive advantage on all its exporting activities over other economies, which are known to be significant (it has become the largest exporter in the world in 2010). Other consequences tend to qualify this statement, such as the inflationary pressure it puts on the Chinese economy. * Illustrates how China’s exchange rate policy, is a part of a monetary policy that has been used by the Chinese authorities as a tool to protect the Chinese market and facilitate its development. * Through the study of the impact of a drastic reduction in the U.S trade balance deficit, concludes that a switch to a floating exchange rate change should be taken into serious consideration by the Chinese authorities, as the resulting appreciation of the Dollar would deteriorate the value of the Yuan * Ends with the gradual and careful way this new system should be implemented, as the banking sector needs to be progressively reformed and prepared to face

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