China's Renminbi: Our Currency, Your Problem - Essay Example

Different countries and analysts have different views regarding the valuation of the Chinese currency. The United States of America is one of those countries which are complaining against the policies of the government of China and claiming that increased regulations and interventions on the part of the Chinese government are resulting in restricting the Chinese currency from appreciating. This, in turn, has resulted in imposing serious challenges and threats for the US economy (Fung and Wong, 1).

On the other hand, the government of China is of the view that they have their own exchange rate policy and no one can intervene in it. Chinese government has refused to accept that the Chinese currency is undervalued. The government has proper exchange rate policy which is being used in order to determine the exchange values. According to Chinese government, the information and details provided by the US government are misleading. If China has considerable trade surplus with the European countries and the United States, then, on the other hand, the country has huge trade deficit with other countries (Fung and Wong, 6).

Both countries have provided their own stances on the issue. However, the government of China should work on making their economy more open and should facilitate the process of international trade and Foreign Direct Investment. Apart from this, the government should reduce the interventions in the economy. QUESTION # 2: The main purpose behind the Chinese government efforts to keep the Chinese currency at an artificially low level against the US dollar is to improve the relative position of Chinese economy in reference to the economy of the United States.

Apart from this, the undervalued currency has allowed China to reduce the prices of the resources considerably and thus, in turn makes it difficult for other countries to compete with the relatively low prices offered by China. This exchange rate policy or strategy on part of the Chinese government is imposing serious threats to the United States. The economy of the United States is experiencing serious issues and challenges because of the tight exchange rate policy of China. According to the government of the United States, the manipulation of the exchange rate by the People Bank of China in order to reduce the prices of exports has resulted in forcing several factories in the US to bankruptcy because of the considerable and uncompetitive prices of the imports of China (Fung and Wong, 5).

This undervaluation of the Chinese currency can also be harmful for the China economy. The trade partners can restrict the free trade with the country and impose high tariffs. For instance, the government of the United States has threatened to impose around 27.5 percent tariff on the imports from China, if the government of China further continues to manipulate the exchange rate of the Chinese currency (Fung and Wong, 5). The government of China is of the perspective that they have not manipulated the Chinese currency and there is a proper exchange rate policy.

The increasing growth of the Chinese economy is not related with the undervaluation of its currency. However, China is not adopting the free floating foreign exchange system. QUESTION # 3: The 20 percent revaluation of the Chinese currency will provide the country with the opportunity to improve the trade relations with other countries. The government of China, with the help of different measures in order to stimulate demand and revaluation of the Chinese currency, can work to balance the economic growth and make it more resilient.

This in turn will have positive effects on the whole