Of course theres no action without a reaction and chinas

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Reference no: EM13619334

Most experts agree that China is keeping the value of its currency, the renminbi, artificially low to give its manufacturing industry a competitive advantage.

A cheap currency helps exports because it reduces the cost of China's goods in other currencies. China wants to keep its huge economic engine humming, and one way it is doing this is by keeping the renminbi cheap. Thus, China has maintained an unofficial "dollar-peg" to keep the value of the renminbi low since allowing it to appreciate modestly through the summer of 2008.

Of course, there's no action without a reaction, and China's cheap renminbi hurts the exports of other countries, namely the United States. So pressure has been growing in the U.S. for the U.S. government to take a harder line.

Princeton professor Paul Krugman thinks that China's currency manipulation is hurting the US economy. He thinks the U.S. Treasury should explicitly call China to the carpet by describing the manipulation as what it is, instead of sugar-coating the behavior, the way it has for years. If this doesn't lead to change, Prof. Krugman thinks the US should then retaliate by enacting a 10% tariff on Chinese imports.

The fear of such actions is that China will then retaliate by dumping its huge hoard of Treasury Bills, which will drive U.S. borrowing costs higher and reduce the value of the dollar. Such fear is misplaced, Prof. Krugman says, because if China destroys the value of the dollar, this will hammer the value of its dollar holdings and help U.S. exports."

As you know Chinese Yuan (Renminbi) is pegged against the dollar. There has been arguments on letting the currency float. Compare a floating currency versus a pegged one? Which method of currency valuation is more informative from the investors point of view (pegged or floating)? Why?

If Chinese Yuan would be floating (and also assume that the Chinese Yuan is currently undervalued), do you think the current account deficit would be higher or lower than the current situation? What about the capital account surplus?

Reference no: EM13619334

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