China's Renminbi Paper Essay Example | Topics and Well Written Essays - 750 words

chinawares Renminbi Paper - Essay caseThis paper will discuss whether the Chinas money stands overrated, and give reasons behind its low repute against the US dollar. It will also point out the likely consequences that rise with a 20% revaluation of China. Question 1 Value of Chinas currency Chinas currency familiarizes itself with many an(prenominal) sanctions. This proves the currency to be different from other currencies like the US dollar, with considerations to capital flow (Saturn, 2008). In 2005, China felt pressure being mounted on her concerning its currency. This made China to unwillingly make changes to its swop rate policy. Critics claim that Chinas currency is over look upond. Their reasoning is that Chinas government is decisively maintaining the judge to make huge profits from trade. The currencys recent rate floats between frail bands around a published comparison in opposition to a basket of other currencies. If its equivalence acts to be too cheap, then Ch inas currency stands at a high value the National Bureau of Economic Research quotes that once putting together vague plus concomitant links which they take accountability for, there is small numerical proof that Chinas currency is overvalued. When currency order at a high value, it portrays the countries willingness to take part in foreign trade, at the current exchange rate. This puts China in a position of selling more goods with its currency than they mountain purchase with a corresponding sum of US dollar. Undervaluing the currency makes exporting goods from China cheaper and allows them to control a large trade surplus with the US. Also, it depicts China as an economical country to locate labor and conciliate goods. This leads to the decision that Chinas currency it not overvalued. Question 2 Reasons behind the currencys low value against the dollar The currencys current value against the US dollar stands at around 2%. This means that 8 RMB is equivalent to 1 dollar. This, in the view of the US government, rates the currency to be lowly bitd. China decided to absorb foreign currencies into circulation, the funds, mainly invested in US Treasury bonds. This brought a secured but low-return investment. It also followed an accumulation of US dollars around 1 trillion in foreign investment in 2007. The main reason behind Chinas decision to place its currency at a low value circulates around what it stands to gain ground from its trade partners these being the likes of US. by exports to US, with the current value of Chinas currency, China gains more through sells. This comes with its own risks because it stirs the feeling of growing to US (Saturn, 2008). China takes the risk of facing harsh sanctions and tariffs from US. If the exchange rate instability goes up, then the value of these assets would also become unstable. The increased instability of financial trade puts pressure to the steadiness of the financial system, and makes fiscal policy objecti ves much difficult to reach. US, on the other hand stands to be exploited with China which seeks to benefit from it. The value of the dollar stands to go down because of low market deficit. Question 3 Risk of the 20% revaluation for Chinas currency The government of China in the recent days has occupied in ideas of revaluation of its currency. It main idea revolves around investing abroad. Chinas main vocation partners are not only western countries. It also trades with Japan, and other Asian and