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    Issues involved with pegging or floating the yuan to US dollar

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    Prior to the financial crisis in 2007/2008, the U.S. Treasury Department as well as Congress had been asking China to revalue upwards the value of their Renminbi or Yuan. China responded to these repeated requests by allowing the Yuan to trade within a narrow band. The band itself was then shifted upwards or downwards by small increments from time to time. Still, the U.S. claimed that China had not done enough and should raise the value of the Yuan by at least a further 20%. The reasons given to justify this requested increase were as follows:
    1. The artificially low value of the Yuan makes U.S. manufactured exports unattractively priced in China.
    2. The undervalued Yuan leads to excessive U.S. imports of Chinese-made goods, which in turn, leads to an unwelcome trade balance in China's favor. For example, the trade deficit with China was roughly -$258,506.0 million in year 2007. These numbers shrunk further during 2009 as recession hit the global economy. In year 2011, the trade deficit with China was roughly -295,456.5 million (http://www.census.gov/foreign-trade/balance/c5700.html).

    China chose to change their 'floating' arrangement and pegged the Yuan to the USD at a rate they selected. China holds such a large investment in U.S. Treasuries as a result of the continuing U.S. trade surpluses that the U.S. does not have a great deal of leverage. If China sold those Treasuries the U.S. dollar would fall significantly in value.

    Discuss what the issues are involved with pegging or floating the Yuan to the US dollar. Use References.

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    https://brainmass.com/business/bond-valuation/issues-involved-pegging-floating-yuan-usa-dollar-608744

    Solution Preview

    The response addresses the query posted in 1417 words with APA References.

    //The currency policies of a country play a crucial role in the economic growth. In this context, in the following discussion, the currency policy of China has been discussed along with the issues involved in pegging or floating Yuan to the US Dollar. The discussion is entirely focused on the economic conditions prevailing in China and United States.//

    The pegging and floating imply currency exchange rates, where pegging means a fixed rate and floating rate means a variable rate. The government of a country determines a fixed rate for the purposes of exchange of home currency with the world's major currencies such as the US Dollars, Euro, Yen, etc., this is called pegging. On the other hand, the floating rates are determined on the basis of demand and supply effect of the market. China's currency policy was drawn on the lines to increase the exports and that has been one the most prominent reasons to limit the appreciation of Yuan against the US dollar.

    China's currency policy follows pegging currency rates, wherein the value of Yuan is fixed with the US Dollar at a time and remains same over the period until changes are made by the government. The demand and supply do not play much role in the determination of the exchange rates of Yuan with the US dollar and this has become a major concern for the United States economy. The appreciation of Yuan against the US dollar is controlled by this policy, which makes China a less preferred choice to export and invest in, however, China becomes most preferred choice for imports as the goods manufactured in China becomes less expensive because of lower value of its currency Yuan as compared to the US dollar (Finn, 2007).

    The Issues Involved in Pegging or Floating Yuan to the US Dollar:

    1.) Decrease in Value of Yuan: The Chinese government adopted pegging Yuan with the US dollar in order to maintain the decreased value of Yuan. The pegging policy provides for a fixed rate of exchange between two currencies. Here, the currency of China that is Yuan was pegged to the US dollar so that Yuan could not get appreciated against the US dollar by adjusting to the market demand and supply conditions ...

    Solution Summary

    The expert examines the issues involved with pegging or floating the yuan to US dollars. The response addresses the query posted in 1417 words with APA References.

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