Meaning of exchange rate

Why China follows fixed exchange rate policy

MERITS (China)
1] Domestic products competitiveness &Profitability at home 2] Overall economic growth

DEMERITS (USA)
1] No automatic balance of bop

2] Large holdings of forex reserves 3] Importing inflation

3] Protects domestic economy

I. China & USA

II. Intervention of

IMF

III.Current scenario

Considerations affecting the choice of regime may change over time. When inflation is very high, a fixed exchange rate maybe the key for the stabilization program. Later, in response to surging capital inflows, flexible exchange rate is required to help relieve pressures. II. Even one countrys non adherence to rules may lead to global crisis.
I.

The need for flexible exchange rate has resulted from increasing globalization of financial markets

To move toward full CAC in a world of volatile capital flows, adoption of flexible exchange rate may become inescapable.

But pegging its currency to USD has helped China during 2008 global financial crisis.

Thus currency peg as a policy measure will always remain a viable option.
It would be premature for China to embrace a floating system. It would be something to ponder only after Chinas financial institutions are developed.

THANK YOU