Importance of Global Business
Why do you think the Chinese government originally pegged the value of the yuan against the U.S. dollar? What were the benefits of doing this for China? What were the costs?
The U.S. dollar was the strongest in the global market. The benefits for China were that their yuan would stay weak, their exports would remain cheap, and their economy would thrive on production for the U.S. economy. The costs for China were that they had to exchange for U.S. dollars every month and that their exchange was the U.S. deficit.
Over the last decade, many foreign firms have invested in China and used their Chinese factories to produce goods for export. If the yuan is allowed to float freely against the U.S. dollar on the foreign exchange markets and appreciates in value, how might this affect the fortunes of those enterprises?
The enterprises would have to pay the factory workers more money. It might not be worth exporting the labor.
How might a decision to let the yuan float freely affect future foreign direct investment flows into China?
Chinas FDI would suffer because countries would no longer hire out Chinas laborers. China would lose working contracts because countrys domestic labor would become more economical.
Under what circumstances might a decision to let the yuan float freely destabilize the Chinese economy? What might the global implications of this be?
The whole idea of keeping the yuan low in value on the global market is so that countries would buy Chinas exports. This kept the Chinese economy thriving. If China no longer provided for the world, all of the other countrys economies would suffer.
Do you think the U.S. government should push the Chinese to let the yuan float freely? Why?
No, the U.S. government would only be harming their economy. Sure, it