Ib Economics Internal Assessment

The first 200 words of this essay...

Ib Economics Internal Assessment

Commentary

Anton Malyshev

22/01/06

Since 1994, the Chinese Yuan has been pegged to the U.S. dollar (8.28 Yuan/USD); this period has caused the Chinese economy to experience an average 8% annual increase in GDP. In order to sustain the undervaluation of the Yuan (by maintaining the peg), Chinese consumers have to keep their savings artificially high and the government has to intervene by buying out U.S. dollars from the United States daily.

Lately, the U.S. has been pressuring China to revalue or float their currency while Chinese economists believe that such an action would cause disastrous effects to their economy.

Even though a fixed exchange rate does not violate WTO or IMF rules it disrupts WTO agreements or is used to gain a comparative advantage. It is arguable that China's peg to the USD is somewhat bending the rules if not breaking them. By keeping their exchange rate lower than market equilibrium, China is able to increase the demand and consumption of their exports because all of the exports have to be bought in the producing country's currency. In addition, the import prices rise (more Yuan exchanged for them).