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BUSI303 International Business
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BUSI303 International Business
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Course Code: BUSI303
University: Liberty University
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Country: United States
Question:
Case Study: Do Yuan to Buy Some Renminbi? Please read the case study carefully and respond to the following: 1. Research the Chinese Yuan and discuss its importance in the global economy.
2. Looking at China’s current economy, discuss their exchange rate and the impact it has had on the foreign direct investment (FDI) in their country.
3. What restrictions does the government have in place to restrict free trade?
4. Discuss whether the Chinese Yuan is being used more in global transactions.
Answer:
1. The yuan keeps the economy of China globally competitive. The yuan is pegged on a basket of currencies including the US dollar, because of this, the yuan value has been maintained in a 2% trading band around a reference rate which has tracked the dollar value. In 215, China adjusted its exchange rate policy which provided the currency with a higher market volatility which made the currency drop, however eventually the government intervened in order to maintain it value.
The yuan becomes stronger on the weakening of the US dollar, this makes the currency weaken compared to the country’s trading partners in Asia and Europe making china’s exports more competitive compared to local products. The devaluation of chin’s currency was a point of contention since it made exports from the US and Europe more expensive hence promoting local production. This could reduce the output from the US and Europe hence making the countries experience a decline in the GDP (Forrest & Gong, 2018)
2. The Yuan value is maintained by the central bank, the peoples bank of China. It tries to redeem dollars for the yuan at the current exchange rate and for it to do so it needs to keep a good supply of dollars in the foreign exchange reserves. However, as the economy grows, it buys more US treasury’s which can be sold fat dollars to meet the level of yuan being redeemed by exporters. Currently china part of the largest foreign holders of the US treasury bonds. China has capacity to threaten the position of the US dollar through the sale of the US treasury bonds since it is a significant shareholder. The china exchange rate policy has increased the attractiveness of FDI into the country. This is because it is cheaper for investors to invest the money into the country and get higher levels of return when the goods are sold outside of china (Talley & Wei, 2015)
3. Since the country positions itself as a developing country, it takes various measures to protect its domestic industries by imposing certain trade regulations in selected industries. In terms of technology, the country has maintained either full or partial blocks against some technology application companies particularly from the US. Automakers can only operate in the country either via joint ventures with local companies and there exists a 25% duty on imported vehicles. Foreign financial firms have equity caps in the participation of certain cervices in china, limiting their market reach. Imports of poultry and poultry products is banned due to avian flue as well as other existing import bans and tariffs on food and agricultural products. In general, the government uses import tariffs and bans to restrict free trade (Wu, 2016).
4. The Yuan is being used more in global transactions and is regarded as the fifth most used currency for global payments. Especially for exchanging payments with China and Hong Kong. This position could improve if more banks start using the yuan as a reserve currency as well as use the yuan for payments of international contracts (Cohen, 2015).
References
Cohen, B. J. (2015). Currency power: understanding monetary rivalry. Princeton University Press.
Forrest, J. Y. L., Ying, Y., & Gong, Z. (2018). Where Will Chinese Yuan Go? In Currency Wars (pp. 527-566). Springer, Cham.
Talley, I., & Wei, L. (2015). Momentum Builds to Label Chinese Yuan a Reserve Currency. Wall Street Journal, 1.
Wu, C. (2016). Can Chinese Yuan Become A Major Reserve Currency?
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