The Importance of the Chinese Yuan in the Global Economy

The Chinese Yuan's value is maintained by the central bank and is pegged to a basket of currencies, making it globally competitive. Its exchange rate policy has increased FDI in the country. The government restricts free trade through import tariffs and bans. The Yuan is being used more in global transactions.

Research the Chinese Yuan and discuss its importance in the global economy.
The yuan keeps the economy of China globally competitive. The yuan is pegged on a basket of
currencies including the US dollar, because of this, the yuan value has been maintained in a 2%
trading band around a reference rate which has tracked the dollar value. In 215, China adjusted
its exchange rate policy which provided the currency with a higher market volatility which made
the currency drop, however eventually the government intervened in order to maintain it value.
The yuan becomes stronger on the weakening of the US dollar, this makes the currency weaken
compared to the country’s trading partners in Asia and Europe making china’s exports more
competitive compared to local products. The devaluation of chin’s currency was a point of
contention since it made exports from the US and Europe more expensive hence promoting local
production. This could reduce the output from the US and Europe hence making the countries
experience a decline in the GDP (Forrest & Gong, 2018)
Looking at China’s current economy, discuss their exchange rate and the impact it has had
on the foreign direct investment (FDI) in their country.
The Yuan value is maintained by the central bank, the peoples bank of China. It tries to redeem
dollars for the yuan at the current exchange rate and for it to do so it needs to keep a good supply
of dollars in the foreign exchange reserves. However, as the economy grows, it buys more US
treasury’s which can be sold fat dollars to meet the level of yuan being redeemed by exporters.
Currently china part of the largest foreign holders of the US treasury bonds. China has capacity
to threaten the position of the US dollar through the sale of the US treasury bonds since it is a
significant shareholder. The china exchange rate policy has increased the attractiveness of FDI

into the country. This is because it is cheaper for investors to invest the money into the country
and get higher levels of return when the goods are sold outside of china (Talley & Wei, 2015)
What restrictions does the government have in place to restrict free trade?
Since the country positions itself as a developing country, it takes various measures to protect its
domestic industries by imposing certain trade regulations in selected industries. In terms of
technology, the country has maintained either full or partial blocks against some technology
application companies particularly from the US. Automakers can only operate in the country
either via joint ventures with local companies and there exists a 25% duty on imported vehicles.
Foreign financial firms have equity caps in the participation of certain cervices in china, limiting
their market reach. Imports of poultry and poultry products is banned due to avian flue as well
as other existing import bans and tariffs on food and agricultural products. In general, the
government uses import tariffs and bans to restrict free trade (Wu, 2016).
Discuss whether the Chinese Yuan is being used more in global transactions.
The Yuan is being used more in global transactions and is regarded as the fifth most used
currency for global payments. Especially for exchanging payments with China and Hong Kong.
This position could improve if more banks start using the yuan as a reserve currency as well as
use the yuan for payments of international contracts (Cohen, 2015).
References
Cohen, B. J. (2015). Currency power: understanding monetary rivalry. Princeton University
Press.

Forrest, J. Y. L., Ying, Y., & Gong, Z. (2018). Where Will Chinese Yuan Go? In Currency
Wars (pp. 527-566). Springer, Cham.
Talley, I., & Wei, L. (2015). Momentum Builds to Label Chinese Yuan a Reserve
Currency. Wall Street Journal, 1.
Wu, C. (2016). Can Chinese Yuan Become A Major Reserve Currency?