China and its exchange rate regime
China and its exchange rate regime. China has a ‘fixed’ rate regime and America and almost all of the developed world have a ‘flexible’ exchange rate regime. Has a fixed rate regime been good for the Chinese economy and Chinese workers? Has their fixed rate regime been bad for the US economy, meaning we get to buy their products extra cheap, but then what are they doing with the money since they do not buy from us? What about the American workers? Also, has the Chinese fixed-rate regime been bad for the Chinese consumers, if so, how?
Sample Solution
China has a fixed exchange rate regime, which means that the value of the Chinese yuan is pegged to the value of the U.S. dollar. This means that the yuan is not allowed to fluctuate freely in the foreign exchange market.Full Answer Section
The Chinese government has maintained a fixed exchange rate regime for several reasons. First, it has helped to keep inflation low in China. Second, it has made Chinese exports more competitive in the global market. Third, it has helped to attract foreign investment into China. The Effects of China's Fixed Exchange Rate Regime There are both positive and negative effects of China's fixed exchange rate regime. Positive Effects- Low inflation: A fixed exchange rate regime can help to keep inflation low by making it more difficult for the government to print money. This is because the government cannot simply print more yuan to pay for its debts.
- Competitive exports: A fixed exchange rate regime can make Chinese exports more competitive in the global market. This is because the yuan is kept artificially low, which makes Chinese products cheaper than products from other countries.
- Foreign investment: A fixed exchange rate regime can help to attract foreign investment into China. This is because foreign investors are more likely to invest in countries with stable currencies.
- Overvalued yuan: A fixed exchange rate regime can lead to an overvalued yuan. This is because the yuan is kept artificially low, which makes it more expensive for Chinese consumers to buy imported goods.
- Unbalanced trade: A fixed exchange rate regime can lead to an unbalanced trade balance. This is because the overvalued yuan makes Chinese exports more competitive, which can lead to a trade surplus.
- Currency manipulation: Some countries have accused China of currency manipulation. This is because China has been accused of keeping the yuan artificially low in order to give its exporters an unfair advantage.
- Cheaper goods: Chinese imports are cheaper for US consumers because the yuan is kept artificially low. This can lead to lower prices for goods and services in the US.
- Increased trade: China's fixed exchange rate regime has led to increased trade between the US and China. This has benefited both countries by providing them with access to new markets and products.
- Job losses: Some US workers have lost their jobs due to competition from Chinese imports. This is because Chinese goods are often cheaper than US goods.
- Trade deficit: China's fixed exchange rate regime has led to a trade deficit for the US. This is because the overvalued yuan makes Chinese exports more competitive, which can lead to a trade surplus.
- More jobs: The fixed exchange rate regime has helped to create more jobs in China. This is because it has made Chinese exports more competitive, which has led to increased demand for Chinese goods.
- Lower prices: Chinese consumers benefit from lower prices for goods and services because the yuan is kept artificially low.
- Higher costs: Chinese consumers also face higher costs for imported goods because the yuan is kept artificially low. This is because the overvalued yuan makes imported goods more expensive.
- Unbalanced economy: The fixed exchange rate regime has led to an unbalanced economy in China. This is because the overvalued yuan has made it difficult for Chinese businesses to compete with foreign businesses.