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Finance & Accounting
Pages 8 (2008 words)
Running Head: USD/CNY USD/CNY: Exchange Rates Name University Part A: Background Infromation: Initially China followed a policy of keeping its exchange rate extremely low. However, it soon realized the adverse affects of its policy and started appreciating its currency…
In other words, Chinese Yuan is not allowed to change its exchange rate according to the forces of demand and supply instead Chinese Government intervenes in the exchange rate market to set the rate it desires. Many experts argue against this policy. They believe that if Chinese government allows the currency market and forces of demand and supply to control the market, the USD/CNY exchange rate will be much higher. Although many economic theorists question the viability of such policy, but it has been proven that the policy has been pretty successful as China is lead the global economy. So much so that even President Obama stated that the Chinese policy of keeping their currency undervalued results in competitive disadvantage for American firms. We can look at the above scenario from the economic theory of fixed exchange rates. Figure 3: Chinese Government Intervention in Exchange Rate Market Source: Sloman, 2004 pp. 235 Figure 1 above shows the how Chinese government keeps it exchange rates at level lower that what it should be. This strategy helps the economy of People’s Republic of China. Chinese firms are more competitive when the exchange rate is lower than when it is higher. ...
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