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Chinese Currency Game

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Submitted By psarthi
Words 444
Pages 2
China is under pressure from US to devalue its currency. US believes that due to low value of Chinese Yuan, china is more competitive in exports vis-à-vis US and hence large trade deficits are leading to job losses in the US. However Chinese government claims China is a sovereign nation has the right to manage its currency and the low value of Yuan is actually helping US manage its budget deficit and by buying US treasury bills it was preventing the rise of US interest rates . Moreover many countries have also established their production base in China and hence any major fluctuations in the currency would hurt them.

However this situation is potentially inflationary and will work only if the China is able to maintain a high growth rate. Moreover if dollar depreciates the Chinese government will have to write off its dollar assets in form of US treasury bills. China in recent past claims to have pegged its currency to a basket of international currency, but even then dollar carries maximum weight. China has also done mild revaluation and allowed daily fluctuations to the range of 0.3% to 0.05%. However the pressure from US persist even though some countries such as Japan and Korea have engaged in processing trade from China and thus benefitted from low Yuan and retaining greater value of trade for themselves.
There are several options available to China:
Revalue its currency: It is estimated that if China revalues its currency say from 3-5 % it is estimated that the exports will grow by 10% instead of 30%. If it is increased by 15% the exports will drop. China needs to provide employment to its labor force migrating from urban to rural areas.
Tax Exports: This will reduce the pressure on China to let its currency appreciate. This will lead to tax revenues as well. But China is an export economy and hence it will hurt its exports and thus employment.

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