Discuss the effect of China\'s government control of the value and exchange rate of the Yuan. Solution Answer Most developed countries allow the market to set the value of their currency. China has taken a different approach. Until 2005, the government kept its currency pegged to the dollar, with the central bank buying or selling currency as necessary to ensure that one dollar was worth around 8.2 yuan. Since 2005, the currency has been pegged to a basket of world currencies, and the exchange rate has changed over time, but China still actively manages the currency\'s value on a day-to-day basis. Currency devaluation is like a nationwide sale. A currency devaluation helps countries sell more exports, boosting the economy. There are thousands of businesses in China that sell goods and services to customers in foreign countries. Their goods are generally priced in China\'s yuan. So if the yuan becomes less valuable relative to other currencies, Chinese imports become cheaper in other countries. Chinese devaluation is also bad for other countries exports. During 2008 financial crisis, Chinese government believed to intervene in the market to make its currency artificially cheap. A cheap yuan gave Chinese exporters an advantage in world markets. Currently the Chinese economy is in the midst of an economic slowdown and has suffered from stock market turmoil which is giving pressure on the yuan. China is slowly moving toward flexible exchange rates. The IMF re-evaluates the currency composition of its SDR basket every five years. In the long run, China hopes to emulate developed economies with fully flexible exchange rates. The yuan will be included in the basket of currencies used by the IMF (reserve currency) in 2016. But many believes that the yuan’s value will continue to be closely monitored and managed by the PBOC. .

1. Discuss the effect of China's government control of the value and exchange rate of the Yuan.
Solution
Answer
Most developed countries allow the market to set the value of their currency. China has taken a
different approach. Until 2005, the government kept its currency pegged to the dollar, with the
central bank buying or selling currency as necessary to ensure that one dollar was worth around
8.2 yuan. Since 2005, the currency has been pegged to a basket of world currencies, and the
exchange rate has changed over time, but China still actively manages the currency's value on a
day-to-day basis.
Currency devaluation is like a nationwide sale. A currency devaluation helps countries sell more
exports, boosting the economy. There are thousands of businesses in China that sell goods and
services to customers in foreign countries. Their goods are generally priced in China's yuan. So
if the yuan becomes less valuable relative to other currencies, Chinese imports become cheaper
in other countries. Chinese devaluation is also bad for other countries exports.
During 2008 financial crisis, Chinese government believed to intervene in the market to make its
currency artificially cheap. A cheap yuan gave Chinese exporters an advantage in world markets.
Currently the Chinese economy is in the midst of an economic slowdown and has suffered from
stock market turmoil which is giving pressure on the yuan.
China is slowly moving toward flexible exchange rates. The IMF re-evaluates the currency
composition of its SDR basket every five years. In the long run, China hopes to emulate
developed economies with fully flexible exchange rates. The yuan will be included in the basket
of currencies used by the IMF (reserve currency) in 2016.
But many believes that the yuan’s value will continue to be closely monitored and managed
by the PBOC.