Case Analysis for Chinese Governments
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Analyze answer the case by answering the following questions:
1.) Why do you think the Chinese government originally pegged the value of the yuan against the U.S. dollar? What were the benefits of doing this for China? What were the costs?
2.) Over the last decade, many foreign firms have invested in China and used their Chinese factories to produce goods for export. If the yuan allowed to float freely against the U.S. dollar on the foreign exchange markets and appreciates in value, how might this affect fortunes of those enterprises?
3.) How might a decision to let the yuan float freely affect future foreign direct investment flows into China?
4.) Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might the global implications of this be?
5.) Do you think the U.S. government should push the Chinese to let the yuan float freely?
6.) Do you think the Chinese government should let the yuan float, maintain the peg, or change the peg in some way?
7.) What has happened with the Chinese government yuan/dollar matter since this case study was written?)
8.) How is this case relevant foreign direct investment, foreign currency exchange, or international monetary issues in any business?
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Solution Summary
Why the expert thinks the Chinese government originally pegged the value of the yuan against the United States dollars is determined. The benefits for doing this for China is examined.
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Question 1
I believe that China pegged the value of its currency, the yuan, to the U.S. dollar in 1994 because at that time the United States was the world's number economy and its currency is considered a highly reliable financial instrument. The benefits of pegging the value of the yuan against the dollar include more control in regulating money supply, and managing exchange rate. Costs include that higher chance of the economy blowing up in a costly currency collapse (Goldstein, 2002, p. 3), an example of which is the managed float currencies during the Asian crisis.
Question 2
Given the level of foreign investments in China and that their investments produce goods primarily for export, allowing the yuan to float freely vis-a-vis the U.S. dollar and other foreign currencies in the foreign exchange markets and to appreciate in value could mean a significant decrease in the fortunes, and thence values of these enterprises. If yuan is to freely appreciate would lead to lower export growth (Sharma, 2006, p. 59) and even ...
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