The US-China Exchange Rate Stand-Off

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Case Details:

Case Code : ECON019
Case Length : 18 Pages
Period : 2002-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : -
Countries : China and USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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China Softens its Stand

On July 21, 2005, China announced a new exchange rate system, referred to as the "crawling peg"30. Under this system, the Yuan was to be referenced, not just to the US Dollar, but to a basket of currencies31...

Yuan's Revaluation:
A Mirage?

At the time of making the first announcement, the Chinese government had hinted that further reforms would be introduced over time.

However, on July 27, 2005, the Chinese central bank announced that no further changes in the value of the Yuan were to be expected in the near future.

Critics were quick to point out that this indicated that the Chinese government would continue to intervene in the foreign exchange markets...

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The Other Point of View

The Chinese government maintained that the Yuan-US Dollar exchange rate was favorable to bilateral trade. It argued that having a trade surplus with the US was not proof that the currency was undervalued... 


As of early 2007, China was a major market for US companies and an important source of capital for the US economy. The Yuan-US Dollar exchange rate remained at levels similar to late 2006 and there were no indications that the Yuan would be revalued in the near future.

The exchange rate on April 26, 2007 was 7.7265 Yuan to the US Dollar (Refer Exhibit VII for the Yuan Dollar Exchange rate between November 2006 and April 2007). In 2006-07, China recorded a GDP growth of 10.5% and increased exports by 25%...


Exhibit I: Yuan-Dollar Exchange Rate in the 1990s
Exhibit II: Trade between US and China (1997- 2005) Top Ten US Exports to China
Exhibit III: US Trade with China: 1995-2007
Exhibit IV: China's Foreign Exchange Reserves: 1990-2005
Exhibit V: The Yuan-Dollar Exchange Rate (January 2005 - February 2006)
Exhibit VI: US and China Compared: Savings, Investment and Consumption as a Percentage of GDP
Exhibit VII: The Yuan-Dollar Exchange Rate between November 2006 and April 2007

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30] A method of achieving a desired adjustment in a currency exchange rate (up or down) by small percentages over a given period, rather than by major revaluation or devaluation.

31]  Basket of currencies refers to a composite unit consisting of weighted amounts of the currencies of a group of designated nations.


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