Essay on Monetary and Economic Policy in Latvia

As most observers took it for granted that the yuan was undervalued, one specific study estimated yuan undervaluation against the U.S. dollar of at least 35% based on the price level of goods and services in China compared with those of its trade partners. As a result, there will probably be a sharp appreciation of renminbi if Chinese government switches over from the fixed exchange rate policy to flexible exchange rate policy. A common figure cited for a 20 to 25 percent move of renminbi would be devastating to China, which would cause deflation, cut economic growth, cut off foreign direct investment and would destabilize Asia. On the other hand, other low-cost countries in Asia may benefit from the shift of FDI and production of multinational companies. However, most high-wage countries like U.S. may still face a rising trade deficit because their imports from other low-wage countries would replace products made in China.

Chapter 11: Global negotiations leave groups more fortunate. A government that is purposefully maintaining inflated currency is robbing buyers of imports and creators of exports. A deflated value has an opposing effect, making imports cheaper and exports less challenging. One piece of currency across the west reduces negotiations and encourages price transparency. However, the United States as an individual country are

The renminbi currency has experienced a fixed exchange rate. The renminbi is seen as undervalued because the value of its currency has been scrutinized to be artificially low, which gives Chinese companies an unfair advantage over floating exchange rate countries such as the US. China has purchased more than $2.2 trillion in foreign exchange reserves in order to maintain an undervalued currency (Scott 2010). China buying US reserves increases the demand for dollars and increases the value of the dollar. Primarily, this makes Chinese goods cheaper in the US and US goods more expensive in China. Keeping a weak currency helps China to boost international exports because other countries purchase China’s goods at a relatively lower price. This helps to maintain growth in China’s economy and provide more manufacturing jobs, a staple to their economy.

To maintain a balanced and successful economy, the North American member governments have used contractionary monetary policies. All the major banks throughout the NAFTA nations decrease the money supply by increasing the overnight lending rate. This causes interest rates to rise either directly or through the increase in the supply of bonds on the open market through sales by the Fed or by banks. This increase leads to a reduction in the price for bonds, which will be bought by foreign investors, thus, increasing the value and demand of the domestic currency and decreasing the value and demand of the foreign currency. This in turn makes domestic products more expensive abroad and foreign products cheaper domestically, causing more foreign products to be sold domestically and less domestic products sold abroad. As a result, there is a higher exchange rate. The higher exchange rate causes exports to decrease, imports to increase as well as the balance of trade to decrease, moving the aggregate demand curve down. However, when imports exceed exports, there is a trade deficit, meaning that there is an outflow of domestic currency to foreign

An undervalued currency also increases China’s attractiveness, as a destination for foreign investments especially from the U.S. Foreign investment is a great way to promote technology transfers, which leads to economic development. Furthermore, tourism industry also boomed as overseas tourists find it cheaper to travel to China than other parts of the world.

Concerns about the safety/stability of foreign assets relative to the United States. People want to invest and save their money in a currency that is not in danger of becoming worthless (like Germany’s after World War I )

It is important to understand the Chinese Yuan 's prediction and impacts since this second world leading economy can influence global economic issues through changes in its currency’s value. In order to forecast the future of Renminbi, it is essential to understand the past and current issues that affect its value. Throughout the essay, the definition of Chinese exchange rate will meant by the value of the Renminbi against the US dollar.There are many factors that could affect the value of the Chinese Yuan, but mostly through the power of the regulatory system. This essay will explain the Chinese monetary and fiscal policies that China has recently used with the description of how these regulations could determine its exchange rate within the short-term. Furthermore, this essay will wrap up with a discussion of ideas and thoughts about the prediction of the Renminbi in the long-run after the exciting news of being included in the reserve currency basket in late 2015.

The International Monetary Fund (IMF) recently highlighted that global recession risks in 2016 had risen, but attached a zero percent chance that China would experience this fate. A scenario of an economically contracting China would send deflationary scares spiralling: government bond yields in advanced markets, particularly safe-haven countries, would collapse and perhaps go negative as investors switched their focus to real returns. Although China is unlikely to experience negative growth in the near term, the economy is clearly growing below trend, thereby imparting a deflationary bias on activity. One possible way to eradicate such forces is to export them by weakening the yuan. The decision by the Peoples’ Bank of China (PBoC) to allow the currency to weaken in August sent shock waves around global financial markets, because it highlighted the risks of further escalation in the Great Currency War. Furthermore, the decision to at least contemplate devaluation to solve deflationary issues was viewed as mimicking the policies of the European Central Bank (ECB) and the Bank of Japan (BoJ). The latter is an old hand at fighting the persistence of falling prices, but the fact is that it is still paying a heavy price for failing to contain the forces that were producing a bubble economy, notably a major expansion of bank lending and corporate debt issuance. Japan consequently experienced a so-called balance sheet recession that

Though currency manipulation is seen as a benefit to the country committing the act it also creates high risk leading to economic or financial crisis therefore disturbing equilibrium; Leading the manipulating country to devalue their own currency to ultimately benefit exports.

The expected prospect estimation of the dollar – the yearnings are having an escalating pressure in deciding the exchange rates level. On the off chance that fund administrators think the exchange rate will increase they want to buy the currency. And if they sense the exchange rates will decrease they offer the currency. The time these save heads will consider might be years, months, days or minutes, so this adds to the making impulse in overall budgetary business focus that

So it is easy to conclude that china’s economic markets are sluggish and weak, for these reasons, China should adopt this monetary strategy to deal with these series of problems, and keeping the healthy and steady growth in economic markets. On the other hand, China wanted to increase the monetary (Yuan) liquidity, further, wanted Yuan to become international reserve-currency. Broadly speaking, China hoped to consolidate its central position in the global economic markets. In conclusion, pulling the healthy and steady growth internally and pushing Chinese monetary (Yuan) circulate in the international economic market, externally are the two key factors drove China to devalue Yuan.

China’s Central Bank had devalued the Yuan by nearly 2% for the second time in August 2015. Having a currency called the “Yuan”, China has one of the most successful economies of our time. Their structural reform in the late 1970’s and their integration with the WTO (World Trade Organisation) has enabled them to fully integrate with the world market and obtain several advantages leading to them being an export oriented economy (Yang Yao, 2011). China’s devaluation has had significant effects on its own economy and the rest of the world such as making its exports cheaper and affecting the aggregated demand of China. The devaluation of the “Yuan” will also have an effect upon the imports by making them more expensive. In this essay these effects will be analysed to a greater extent.

Chinese Ren Min Bi has become one of the world’s elite currency. On Monday, November 31, 2015, The International Monetary Fund has approved China 's yuan into its elite reserve currency. As this decision announced, it will impact China’s economy. This new policy will help pave the way for broader use of the renminbi in trade and finance, securing China’s standing as a global economic power, just like four other currencies — the US dollar, the European euro, the English pound and the Japanese yen.

So it is easy to conclude that china’s economic markets are sluggish and weak, for these reasons, China should adopt this monetary strategy to deal with these series of problems, and keeping the healthy and steady growth in economic markets. On the other hand, China wanted to increase the monetary (Yuan) liquidity, further, wanted Yuan to become international reserve-currency. Broadly speaking, China hoped to consolidate its central position in the global economic markets. In conclusion, pulling the healthy and steady growth internally and pushing Chinese monetary (Yuan) circulate in the international economic market, externally are the two key factors drove China to devalue Yuan.

One factor which has the potential to cause a crisis with a currency is an unstable economy that has been or is in the process of economic deregulation. Without proper governance of the financial or economic systems of a country, the market price of a currency and the confidence in that currency may be weakened. If other countries perceive another economy to be weak, then certainty about investments in trade, industries, and the currency itself may fall. Countries and companies are less likely to participate in business with a country which has an unstable or poorly regulated economy, which can weaken a currency further.