China Currency Exchange Rate Essay Example for Free

mainland China Currency Exchange Rate judgeThe currency regime draged by China is neither fixed nor flexible exchange stride system. China has announced in 2005 the end of its firm peg against the dollar, instead allowing it to trade within a narrow band against a basket of currencies. China regime is managed floating system where the currency increases really slowly year by year and the China government prevent the currency from changing quick in the short term. The reason why Chinese government intervene in the currency trade is to lower exchange rate to increase employment, maintain a fixed rate to maintain stableness and improve their current account deficit. China government manage its currency rate by purchasing foreign currencies to increase supply of China currency, therefore lowering its currency measure out. They also lower the value of its currency by lowering their interest rates.In the case of China, it is very difficult and challenging for them to adopt the fixed exchange rate system due to their disadvantages. Firstly, China government must always make up its interest rate so maintain the exchange rate. Changing the interest rate frequently testament cause fluctuations in investments and growth and also stable employment.There is also a possibility that the merchandise rate may be set at the wrong level. For example, if it was set at a higher(prenominal) level, this could affect China export competitiveness 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 lessen system. Firstly, the managed flow system will ensure stability in China compared to floating. This is because if China suddenly apprize their currency, their exports production will suffer and there will be lots of unemployment as a result. even there are disadvantages to managed floating system as well. People will try to challenge the hit funds from the currency as this system is very prone to speculative attack. Experiences have shown that speculative attacks could minify the growth of a countrys gross domestic product by 6 percent or more.