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Will China revalue its currencyCauses of devaluation Mechanisms Implications - Essay Example

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Will China Revalue its Currency

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China has revalued its currency at many occasions since the beginning of economic reforms in 1979. It follows the laws of the fixed exchange regime where the currency is devalued and revalued at will. …
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Will China revalue its currencyCauses of devaluation Mechanisms Implications
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Download file to see previous pages It follows the laws of the fixed exchange regime where the currency is devalued and revalued at will. For years, China maintained a fixed exchange rate; allowing to appreciate at its will. It has, now and again, manipulated its currency to gain a competitive advantage in the global trade market; and it has allowed China to maintain supreme dominance over the world markets. Nonetheless, the country has been facing immense pressure since a decade to float the currency in the open market and allow the currency to appreciate to a free rate. China did allow appreciation for a while, but at a gradual pace with interruptions. (Murphy 2009) The world continues to ask: will China revalue its currency? The essay will provide justifications for both sides; it will provide the reasons behind the devaluation, the mechanisms used as well as implications on an undervalued Yuan. The essay will end with a strong conclusion followed by recommendations. At present, economists believe that the Chinese currency is still undervalued by 15 to 20 percent. They opine that the revaluation will benefit the global economies and help reduce the increasing trade deficits. However, the Chinese politicians believe that the revaluation will hurt their economy and growth; as well as their political control. (Johnson 2013) Causes of Devaluation In the domestic sphere, analysts, in the Chinese circle, believe that revaluation will make their exports expensive compared to today. This consequential drop in Chinese exports will lead to several immediate factory shutdowns; while many others will shift to the low wage economies such as Vietnam and Sri Lanka. (Johnson 2010) This will upset the economy as a whole especially the working class. The resulting unemployed from the layoffs and shutdowns in the remote areas will not easily be absorbed into the economy. This will create anti government sentiments and result in isolated mass incidents around China. (Johnson 2010) “Any significant appreciation of the renminbi will erode China’s export competitiveness overnight and impact the livelihood of tens of millions of workers1,” states an editor at China Daily media agency. Likewise, Chinese politicians strongly believe that the currency reforms, pushed by the US and other global powers, are only means to slowdown its economy and contain growing Chinese power. These politicians refer to similar US policies towards Japan in 1980s. Japan stills reels from the effects of the real estate bubble burst caused by the forced US policies. Therefore, the Chinese are eager not to repeat the same episode. (Lee 2010) (Murphy 2009) Similarly, China thinks alike all the economic powers of the world. It first thinks about the domestic affairs especially employment figures before working towards rebalancing of the macroeconomic indicators around the world. In the aftermath of the financial crisis 2008, the Chinese lost 20 to 40 million jobs related to the export oriented industries. This forced Chinese to put an to the revaluation thoughts for some time. (Lee 2010) A research conducted by the Chinese authorities on the streets showed that a percent appreciation in the value of Yuan will lead to a percent decline in the tiny profit margins of the small export oriented companies. Economists opine that an undervalue Yuan is critical for sustaining the Chinese growth; therefore, all the intimidating by the world leaders will not change the Chinese policy. Revaluation will benefit China in the Long Run Other economists believe that the revaluation of Yuan will benefit China in the long run. It will do more good than harm. Economists know that, at present, the Chinese economy is heavily depending on exports and fixed investment; and not on the local consumption. It must revalue its ...Download file to see next pagesRead More
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