The Revaluation of Chinese Yuan
Problem Definition
Throughout 2004 to 2005, U.S. Government had urged China to revalue the Chinese Yuan, from its long peg to U.S dollar of Yuan 8.28/$. U.S argued that growing Chinese trade surplus that Yuan was significantly overvalued.Even many Chinese also acknowledged that remaining the pegged rate was costly, as continued to buy U.S dollars.
On the other side, Chinese government and many international trade experts did not agree. Argued the trade surplus with the U.S was a result of competitiveness, cost of production and so on. So the revaluation of Chinese seems to be a political issue among China, U.S, Europe and Japan.
The Chinese economy continued to growth more than 10% of its real GDP, so the economy was too large to remain a second-rate country. The immediate change was a revaluation of approximately 2.1%, much smaller than the critics said it should be 10% to 20%.
Chinese economy has become increasingly integral to the economies of Asia, so the revaluation is also relative more to Asian countries. Chinese export to almost everywhere in the world, an revaluation of Chinese Yuan could mean the cost of goods sold rise in terms of dollar or euro, the export would face change. However, imports such as purchasing airplane, could be easier.
Approach
If the Chinese Yuan is devalued, U.S. Dollar is appreciated, Chinese Yuan goes down compare with dollar. China had a dollar-pegged system in 1997, for around Yuan 8.28/$. The immediate change was to Yuan 8.11/$ still not undervalued. In July 21, 2005, China reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.
China was under too much pressure from the U.S, Europe, Japan and other countries about the Yuan revaluation. Socialism and the market forces the Chinese government to revalue in order to reduce its export surplus.Analysis
1.Chinese Yuan is devalued,...