SUBMITTED BY: AIMEN QURESHI

(L1S15MCOM0009)

THE CHINESE YUAN: BE CAREFUL OF THE

DRAGONS TAIL

Question # 1
Evaluate the three choices that china faces in dertermining what to
do with its cureesncy value which choice whould you chosse and
why?
Answer:
Three choices
China has to keep fixed rate against dollar.
Go foe the free float,leading the market to fix the value of currency.
Peg yuan against a basket of currenices.
If I were to make chioce I whould to prefer the third option that is peh yuan
aginst a basket of currencies. This will reduse the probilbility of sharp value
of yuan that will make yuan ratherstable as even if one currency looses value
another will again. It is also possible to assign highere weight to thr more
stable currency klike US dollar and japenese Yen.
Question # 2
On july 23,2005, china revalued the yuan by 2.1 percent .givemn
that the exchange rate was 8.2725 prior to the revaluationb , look
at the exchange rate today. How much has the yuan revalued
against the dollar sinbce then? Do you think this is enough to take
the pressure off China? Why or why?
Answer:
Current exchange rate of chinese yuan is 6.36
So accouinding to simple calculationthe chinese yuan appreciate by approx .
24% (base year 2005).
According to the case there are two mainly reasons for the pressure of China.
Unemployment rate
Chinas urban unemployment rate is 4.1% which was 4.4%in 2004-2005
average unemployment rate is 4.04%
Exports
China exports is good $177.97 billion, but it cant balance the factor of
unemployment rate with proportion to the population increase in china
I think that is not enough for the US to take the pressure of china even this
revaluation was problem for china because it made the things more difficult

for the business and economic environment. This because US is still with a
high deficit and is still fighting against the yuan currency.

Question # 3
Using table 10.1 ehich exchange -rate arrangement is cghina usinh
now? Be sure to read the footnotes.
Answer:
China has other convertional fixed exchange rate regimes. China adopts
more than one nominal anchor in the management of the monetory policy.
The exchange rate of the renmibi is a conventional fixed exchange rate
regimes.
Question # 4
Assume you are a chines e exporter. Would you prefer a Chinese
export tariff on selected garment and textile exports as a way to
relieve pressure against the yuan or a revaluation of the currency?
Why?
Answer:
If I am a chines exporter, than I sell my products and I get paid with dollars
which I have to change in the country in order to use them. If it is revalued
the currency then what will be done is increase the relative value of the yuan
on the dollar, something that to me as exporter doesnt me, since for every
dollar I get fewer yuan than before. What will be useful to me in this case
would have a tariff of selecting clothing and textile exports because I do not
work with these products than not affect me that export tariff instead of the
currency revaluation affects all levels of exporters and also to importers, but
in the opposite direction.
Question # 5
China has the largest foreign -exchange reserves in the world $1.33
trillion by the end of the second quarter in 20007. This is compared
with foreign- exchange reserves of about $165.6 billion in 2002.
Why do you think china reserves have grown so much in less than
seven years? How that can that large position help china manage
the value of the yuan? Most of chinas foreign- exchange reserves
are in U.S. treasury bills. If you were an adviser to chinas central
bank, would you recommend china continue that course, or are
there alternatives?

Answer:
According to the text, the reserves in the central bank are essential to the
financial strength of the country. These are three types of reserves assets:
gold, currency and the IM- related assets. This has aimed to protect
themselves from financial crises and that is probably what you want china to
increases its foreign exchange reserves to maintain the stability. Probably
due to the growth of china is sought to have competiveness at global level.
Another way of maintaining the stability of the currency is through the
intervention of the central bank, through the buying and selling of a currency
to effect its prices.
The Chinese has the option of investing in other currencies, as it could for
example be the Euro, which would elevate the United States interest rates,
slowing the US economy and reduce demand for Chinese products, natively
affect the china economy.
So based on what we have learned, I would recommend china follow in this
direction.