China Currency Exchange Rate Essay

The currency regime adopted by mainland china is neither fixed nor flexible exchange rate dust. China has announced in 2005 the finis of its firm peg against the dollar, instead allowing it to trade within a narrow band against a handbasket of currencies. China regime is managed floating constitution where the currency gains very slowly socio-economic class by year and the China government prevent the currency from changing quickly in the short term. The reason why Chinese government intervene in the currency market is to lower exchange rate to increase employment, watch a fixed rate to maintain stability and improve their current account deficit.China government manage its currency rate by buying extraneous currencies to increase supply of China currency, on that pointfore lowering its currency value. They in any case lower the value of its currency by lowering their concern rates.In the case of China, it is very difficult and challenging for them to adopt the fixed exchan ge rate trunk due to their disadvantages. Firstly, China government must always adjust its interest rate so maintain the exchange rate. Changing the interest rate frequently will cause fluctuations in investments and growth and also stable employment.There is also a possibility that the export rate may be format at the wrong level. For example, if it was set at a higher level, this could affect China export battle and their domestic market will suffer.Question 4bThough China has been heavily criticised by some foreign countries like USA for their practice, there are some advantages to managed flow system. Firstly, the managed flow system will hear stability in China compared to floating. This is because if China suddenly appreciate their currency, their exports production will suffer and there will be lots of unemployment as a result.However there are disadvantages to managed floating system as well. People will try to challenge the earn funds from the currency as this system is very prone to speculative attack. Experiences have shown that speculative attacks could decrease the growth of a countrys gross domestic product by 6 percent or more.