University International Business Case Study: Chinese Yuan Analysis

This case study analyzes the Chinese Yuan's value and its implications in international business, focusing on the period from 1995 to 2020. It examines the Chinese government's currency value determination, including modifications to the fixed exchange rate, market intervention, and currency policy evolution. The analysis highlights the impact of exchange rate fluctuations on China's foreign exchange reserve and trade. The study evaluates the effects of export tariffs and monetary policies. The author suggests that modifying the fixed exchange rate to a floating currency rate would be the best option for maintaining stability in the foreign exchange market. The study references data on exchange rate trends and discusses the implications of the yuan's valuation on China's economy and global trade, including the challenges of currency devaluation and the importance of adopting flexible exchange rate strategies.

Running head: INTERNATIONAL BUSINESS
International Business
Name of the Student
Name of the University
Author Note

1INTERNATIONAL BUSINESS
Table of Contents
Answer to question 1.......................................................................................................................2
Answer to question 2.......................................................................................................................3
Answer to question 3.......................................................................................................................3
Answer to question 4.......................................................................................................................4
Answer to question 5.......................................................................................................................4

2INTERNATIONAL BUSINESS
Answer to question 1
Three choices that Chinese Government faces while determining the currency value:
Modification of the fixed exchange rate: From 1995 to 2005, the currency value of China was
pegged with respect to the US dollar. However, yuan, China’s national currency has been started
devaluing through a narrow trading band (Aftab, Muhammad and Izlin Ismail).
Supervise the currency value through market intervention: In this way, the Chinese
government can purchase or sell currency through interbank market maintaining the standard
foreign exchange reserve.
Evolution of currency policy: China can integrate its domestic economy with the international
by promoting the yuan as a global reserve currency.
Out of the above three discussed options, it would be the best option for the Chinese
economy if it modifies its fixed exchange rate to the floating currency rate. This will help the
country to maintain stability between the supply-demand conditions of the foreign exchange
market.

3INTERNATIONAL BUSINESS
Answer to question 2
Fi
gure 1: Trend in exchange rate in China over 2005 -2020
Source: (Ceicdata.com)
Figure 1 illustrates that exchange rate in China has been changed by 17.82% against
dollar from 2005 to 2020. During 2016, the foreign exchange rate of the country has severely
declined from $4 trillion to $3.19 trillion. The continuous sale of the foreign assets and
speculative demand for the foreign currency are accountable for this unprecedented loss. In this
context, the country attains to lower the currency value in the international market.
Considering the IMF’s standard benchmark, China’s foreign reserve has surpassed the
limit. Therefore, the country does not need to lower its currency value of yuan.
Answer to question 3
China has recently made some relaxation in its pegged currency system. This modified
currency system is considered as a part of gradual reformation of the country’s existing fixed
exchange rate system. This step intends to bring stability in yuan in respect of dollar value.

4INTERNATIONAL BUSINESS
Answer to question 4
Having been a Chinese exporter, a Chinese export tariff on selected materials would not
be preferable option.
This is because imposition of export tariff would enhance the burden as the exporter
needs to pay tax on the export amount. This lowers the revenue of the exporters. In his regard,
the exporter attains to hike the price of the export commodities to maintain the revenue, which in
turn, makes the Chinese products expensive for the foreign buyers (Barros et al.). This further
decrease the demand for the commodities exported from China.
Answer to question 5
The robust growth in the foreign exchange reserve is the result of the China’s pegged
currency value. The country has been attainting to keep the currency value lower than the
average dollar value of the international market.
This large reserve position helps China to dominate the global trading sector following
the fixed exchange rate system in the international trading system.
Tightening monetary policy gives little impact on the international economy. Currency
devaluation triggers a potential challenge for the Chinese economy in terms of economic shock
and loss of reserves (Wang). The Central Bank of China needs to adopt the combination of the
flexible and fixed exchange rate to get adjusted with real exchange rate movement.

5INTERNATIONAL BUSINESS
Reference list
Aftab, Muhammad, and Izlin Ismail. "Impact of currency reform on Chinese external
trade." International Journal of China Studies 9.1 (2018): 67-78.
Barros, Carlos P., Luis A. Gil-Alana, and Zhongfei Chen. "Exchange rate persistence of the
Chinese yuan against the US dollar in the NDF market." Empirical Economics 51.4
(2016): 1399-1414.
China Exchange Rate Against USD [1957 - 2020] [Data & Charts]." Ceicdata.com. N. p., 2020.
Web. 7 Apr. 2020.
Wang, Yongqing. "Effects of exchange rate and income on the US bilateral trade with China
under Chinese managed floating exchange rate system." Journal of Chinese Economic
and Foreign Trade Studies (2018).