China's Renminbi Paper - Essay Example

This paper will discuss whether the China’s currency stands overrated, and give reasons behind its low value against the US dollar. It will also point out the likely consequences that rise with a 20% revaluation of China. Question 1: Value of China’s currency China’s currency familiarizes itself with many sanctions. This proves the currency to be different from other currencies like the US dollar, with considerations to capital flow (Saturn, 2008). In 2005, China felt pressure being mounted on her concerning its currency.

This made China to unwillingly make changes to its exchange rate policy. Critics claim that China’s currency is overvalued. Their reasoning is that China’s government is decisively maintaining the value to make huge profits from trade. The currency’s recent rate floats between thin bands around a published equivalence in opposition to a basket of other currencies. If its equivalence acts to be too cheap, then China’s currency stands at a high value; the National Bureau of Economic Research quotes that: "once putting together vague plus serial links which they take accountability for, there is small numerical proof that China’s currency is overvalued.

" When currency rates at a high value, it portrays the countries willingness to take part in foreign trade, at the current exchange rate. This puts China in a position of selling more goods with its currency than they can purchase with a corresponding sum of US dollar. Undervaluing the currency makes exporting goods from China cheaper and allows them to control a large trade surplus with the US. Also, it depicts China as an economical country to locate labor and manufacture goods. This leads to the decision that China’s currency it not overvalued.

Question 2: Reasons behind the currency’s low value against the dollar The currency’s current value against the US dollar stands at around 2%. This means that 8 RMB is equivalent to 1 dollar. This, in the view of the US government, rates the currency to be lowly placed. China decided to absorb foreign currencies into circulation, the funds, mainly invested in US Treasury bonds. This brought a secured but low-return investment. It also followed an accumulation of US dollars around 1 trillion in foreign investment in 2007.

The main reason behind China’s decision to place its currency at a low value circulates around what it stands to benefit from its trade partners; these being the likes of US. Through exports to US, with the current value of China’s currency, China gains more through sells. This comes with its own risks because it stirs the feeling of exploitation to US (Saturn, 2008). China takes the risk of facing harsh sanctions and tariffs from US. If the exchange rate instability goes up, then the value of these assets would also become unstable.

The increased instability of financial trade puts pressure to the steadiness of the financial system, and makes monetary policy objectives much difficult to reach. US, on the other hand stands to be exploited with China which seeks to benefit from it. The value of the dollar stands to go down because of low market deficit. Question 3: Risk of the 20% revaluation for China’s currency The government of China in the recent days has engaged in ideas of revaluation of its currency. It main idea revolves around investing abroad.

China’s main trading partners are not only western countries. It also trades with Japan, and other Asian and