Abstract

The economy of China, witnessed marvelous growth since mid 1990s in its exports. Helped by growth in exports, China maintained huge positive trade balance with most of its major trade partners and vast forex reserves. China was accused, by its trade partners, of keeping its currency undervalued to maintain cost competitiveness for its products in global markets and thus increasing its exports. By mid-2010, pressure mounted from all quarters on China to revalue its currency so that the real value of the yuan vis-à-vis other currencies would be depicted. Though China remained silent on the issue, economic observers opined that it would have to yield to the pressure sooner or later. They also said that revaluing the currency might not yield results in the short term.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Aspects of pegging, the crawling peg, and the equilibrium exchange rate in terms of nominal and real exchange rate.
• The effects of value of a currency on the respective country's export performance.
• The effect of exchange rate on the balance of payment of a country.

Keywords

Foreign Trade, Currency Valuation, China's Currency, Exchange Rate Management, Import Export Mechanism, Currency Pegging, Trade Balance, Forex Reserves, Nominal Effective Exchange Rates, Real Effective Exchange Rates, Trade Deficit, Interest Rates and Exchange Rates, Equilibrium Exchange Rate