Exchangerateof theYuan

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Nonetheless,
the yuan is peggedto the dollar,so the value cannot
fluctuateas much as it shoulddo. The centralbank of China intervenesby
the supplyof yuansin the
buyingmillionsof dollarswith yuans,increasing
market.This shifts the supply curve outwardsfrom SY to SY2, creatingan
excessof supplyat the currentpriceof 0.20$from Q2 to Q4, loweringdown
a g a inth eva l u eto 0 .1 5 $p e ryuan.
China's interventionin the market forces creates unbalancein the
market,affectingother economies.The governmentdepreciatesthe yuan in
purpose,
(thatit hasa lowervaluethanthe one it should
makingit undervalued
have). lf the yuan is undervalued,
then the domesticprices have a better
relativepriceto the onesof foreignproducts.
On the other hand, the peggedexchangerate system depletesthe
nationalreservesof Chinasincethey haveto constantlybuy millionsof dollars
withyuans.This actionmakesChinaunableto respondto shocks,whichis the
actualsituation
of China.
As the article informs,China has locked the yuan exchangerate,
meaningthatthereis moresecurityin the marketand lessspeculation.
China
neededtodothis,thegoVernmenttookintoconsiderationthe%
condition,whichstatesthat a strongerexchangerate will worsenthe curren,
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accountbalanceSincethe yuanwas startingto rise,the government
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Economy
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it is not precise)
(Thediagramis basedin estimations,
of the currentaccountbalance
The diagramaboveis a representation
of the Chinese
(thedifference
betweena nation'ssavingsand its investment)
theyuan.At T1,
willdevaluate
it assumesthe Chinesegovernment
economy;
the globalrecessionstartsandthe currentaccountbalancedrops,as wellas
the pointwherethe Chinesegovernment
the exchangerate.T2 symbolizes
freezesthe exchangerateand,assumingceterisparibus,the currentaccount
balanceremainsfrozen.

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curvewouldoccur.The J-curveassumesthat in the shortrun,therewouldbe a

the marketwouldnotimmediately
in the currentaccountbalance:
reduction
rate,meaningthattherewouldbe the
to thechangein the exchange
respond
samedemandfor a lowerexchangerate(ergo,lessprofits).Whenthe market
reactsto the changein the exchangerate,T4 wouldoccur,raisingthe current
accountbalance.
the US is a major
Actually,China is one majorsupplier;meanwhile,
As the articleinforms,someUS economistsarguethat it is time for
consumer.
meaning
The yuanis no longerundervalued,
Chinato be the majorconsumer.
that its value has been constantlyincreasing.Assumingthis process
The imports
continuous
steady,the exchangerate would keep increasing.
wouldsurpassthe exports,sincethe relativepricewould no longerbenefit
China.In the longrun,Chinaandthe US couldchangetheirpositions.

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