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Case Analysis of China Pegged

Exchange Rate
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 mince £ China has pegged the val e of its c rrency the
y an to the Um dollar at an exchange rate of Um $£ to 8.8
y an.
 To preserve the val e of y an against the dollar the Chinese
central bank reg larly bo ght or sold dollar and has stricter
c rrency control than ost co ntries.
 Early  press re was b ilding for china to alter its
exchange rate policy .
 Pegged exchange rate nderval es the y an by as  ch as 
percent .
 This has res lted the boo in China export and liit iports.
 It has lead to job losses of Aerican an fact ring

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 Pegged exchange rate syste has been probleatic to Chinese


too.
 Reported that in  the ann al inflation rate rose above  for
the first tie in seven years.
 Q estion was raised whether china shall oved to floating
exchange rate regie.
 Circ stances - Chinese banking syste is very weak. As  ch
as  of all bank loans are nonperforing.
 Moving q ickly to free float raises the possibility of destabilizing
the econoy even ore.
 Chinese are taking step to restr ct re their banking syste
increasing the loan loss reserves of banks and reoving political
infl ence fro lending policies.
 They are also actively debating a grad al approach toward
changing dollar y an exchange rate.

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Th s this is the case abo t :


4 Benefit and cost to china d e to its pegged exchange rate.
4 Factor china need to consider before oving to floating
exchange rate regie .
4 Gives s idea abo t ipact to foreign firs which have
invested in china d e to y an floating exchange rate regie
and appreciate in val e .
4 Inforation abo t shall y an float aintain the peg or
change the peg in soe way.

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 To f el a boo in Chinese exports to the West


partic larly to the United mtates.
 To anage its foreign exchange rate risk as ost of
the Chinese exports are ade fro dollar-
denoinated iported aterials and energy.
 To itigate the risk for investors coing into China.

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 Able to stabilize its  Manage the peg d e to


econoy which it has to be
 Prevent U.m. Dollar active in the foreign
fro deval ation as exchange arkets
Chinese leaders are  Dollar¶s oveent p
c rrently holding abo t or down affects the
 h ndred billions in Chinese econoy
Aerican Treas ry
bills and bonds
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 Over the last decade, many foreign firms have


invested in china and used their Chinese factories to
produce goods for export. If the Yuan is allowed to
float freely against the US dollar on the foreign
exchange markets and appreciates in value, how
might this affect the fortunes of those enterprises?

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Affect on enterprises operating in China

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 the Y an¶s rise co ld help foreign
carakers operating in China ² incl ding GM and
Ford ² by aking iported a to parts less
expensive.
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Cont««.
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 The cons ers of Chinese prod ct will have to


s ffer as the cost will be transferred to the in the
for of high prices.

 For instance soe retailers that s pply fro


China ² like the E ropean clothing stores H&M
Hennes & Ma ritz and Next Retail ² co ld see
their expenses rise as a res lt of the decision.

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 Choice of any nation to decide on which exchange


rate regie it sho ld follow either floating or pegged
 China engaged in heavy foreign exchange arket
intervention in order to keep its c rrency pegged to
the U.m. dollar
 It t rned o t to nder val e the Y an helping to f el
a boo in Chinese exports to the West partic larly
U.m.

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 The cheap Y an haring:


X Aerican an fact res
X Leading to job losses
X Threatening the case of free trade
 Th s the U.m. governent sho ld p sh the Chinese
to let the Y an float freely.
 The effect of a Y an appreciation wo ld deliver an
extra ret rn for U.m. investors in Chinese assets.
 It is beneficial to protect its nation fro f t re
econoic crisis.

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 China sho ld not let its c rrency freely float


 The pegged Y an to the Dollar is increasingly
creating proble for Chinese too.
 Floating exchange rates tend to be highly volatile
and destabilizing in co ntries with nderdeveloped
doestic financial arkets as the local copanies
wo ld be exposed to exchange rate risk and the
already financially tro bled state-owned enterprise
sector ight collapse.
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 It will jeopardize their export-led strategy


 A large appreciation wo ld translate into a large
drop in Chinese iport prices; agric lt ral iports
wo ld threaten illions of Chinese farers
 A lot of overseas investors ight ove their factories
or copanies o t of China

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In Concl sion
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 China sho ld be accopanied by deep refors in


different areas s ch as:
X Banking sho ld be recapitalized and restr ct red
X Bad loans sho ld be provisioned f lly
X mtate owned copanies' sho ld be onitored and
anaged well to lessen the b rden of debt.
X Reoving political infl ence on lending policies.
 Th s China sho ld change its peg soe other way
so that it will not p t the global econoic recovery
at risk.
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