CH 11 Closing 1 - they are creating This can eventually...

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The reason that China devalued the Yuan against the U.S. dollar was to gain an advantage in trade. By keeping the value of the Yuan lower than the dollar, they are able to make their goods cheaper and thus can export high quantities of goods. In turn due to the cheaper currency, it will encourage investments in China again boosting their economy and allowing them to keep the economic boom. However, this cannot be done without a cost to the Chinese government buying excessive amounts of dollars. In early 2005, the Chinese were buying somewhere near $15 billion dollars each month (Hill, 2007 p. 387). However when China takes the money they have bought they must now replace it with Yuan. Thus, Chinese are constantly issuing more Yuan to fill in the gap
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Unformatted text preview: they are creating. This can eventually break the Chinese economy for they have a weak banking system and cannot easily switch over to a free-floating exchange rate. On the other hand, they cannot indefinitely continue buying dollars and issuing more Yuan, this will increase inflation, which is already on the rise. Thus, while this system in beneficial for increasing the overall global economic success of a nation it will eventually lead to internal difficulties that could lead to the collapse of the economy in their greed to quickly become an international economic power. Hill, C.W. (2007). International Business. New York, NY: McGraw-Hill/Irwin...
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