YOU ARE REQUIRED TO ANALYZE THE CASE BASE ON YOUR AGREEMENT OR DISAGREEMENT WITH THE CONTENT. WHATEVER YOUR POSITION IS, YOU MUST SUPPORT YOUR ANALYSIS WITH INFORMATION FROM THE E-TEXT AND FROM AN ACADEMIC ARTICLE.

• Analyze the case completely using the information in the case and information in the various chapters in the e-Text. Your analysis should not be a short response to the case. Rather, it should be a more detailed write up. This is where you demonstrate how much you understand the material. The grade for this case depends heavily on how you respond to the issues and or problems shown in the case. Include historical/current/comparative information provided in the case, analysis of key elements or factors affecting the issue etc.

Is China a Currency Manipulator? Trade tensions between the United States and China have run high during the 2000s. In 2009, U.S. Treasury Secretary Timothy Geithner restated a long- held American accusation that China's desire to manipulate its currency hurts the U.S. economy. He noted that to prevent the yuan from appreciating, the People's Bank of China has massively intervened by selling yuan and purchasing dollar- denominated assets such as U.S. Treasury securities. As the argument goes, China's currency policy has resulted in its yuan being significantly undervalued relative to the dollar, giving the Chinese an unfair competitive advantage. An undervalued yuan makes U.S. exports to China more expensive than they would be if exchange rates were determined by market forces. This undervaluation harms U.S. production and employment in manufacturing industries such as textiles, apparel, and furniture that have to compete against artificially low‐cost goods from China. An undervalued yuan also makes Chinese goods cheaper for American consumers, encouraging them to import more goods from China. As a result, China takes jobs away from Americans. If the dollar-yuan exchange rate was set by market forces instead of being manipulated by the People's Bank of China, the yuan would appreciate sharply, increasing the price of Chinese exports and taking pressure off U.S. manufacturing industries. China's huge trade surplus with the United States and its large accumulation of dollar reserves are cited as evidence that China has manipulated the value of its currency relative to the dollar for competitive advantage. For the sake of stability in the economies of the United States and China, and also the global economy, action needs to be taken to allow market forces to determine the dollar-yuan exchange rate. However, other analysts contend that there is little or no connection between the yuan and the health of U.S. manufacturing. They note that the transition away from manufacturing in the United States is a long-run trend that goes far beyond competition from Chinese exports. Jobs have been slashed because technological improvements have made each worker more productive. Moreover, if the United States wants to make its workers more competitive with those in China, it should reform its educational system rather than rely on illusory gains from changes in exchange rates. Also, there is a good economic rationale for China's desire to maintain a stable value against the dollar. As long as this fixed rate is credible, it serves as an effective monetary anchor for China's internal price level. After inflation skyrocketed to more than 20 percent per year during 1993-1995, the fixed rate anchor helped China regain price-level stability. Moreover, China's currency inter vention yields positive results for the U.S. economy. China has maintained large investments in U.S. debt, which helps keep U.S. interest rates low, allowing American firms to make investments that would be unattractive at a higher cost of borrowing. Such investments increase the amount of capital available and thus increase the size of the economy. An undervalued yuan also promotes a lower inflation rate in the United States. Also, China argues that its currency-peg policy is not intended to favor exports over imports, but rather to foster economic stability. Chinese officials note that many developing countries, including China, tie their currencies to the dollar at a fixed rate to promote economic stability. Chinese leaders fear that abandoning the peg could induce an economic crisis in China and would especially damage its export sectors at a time when painful economic reforms, such as shutting down inefficient state‐owned businesses and restructuring the banking system, are being implemented. Simply put, Chinese officials view economic stability as crucial to maintaining political stability. They are concerned that an appreciating yuan would reduce employment and decrease wages in several industries and thus cause worker unrest. Rather than relying on an appreciation of the yuan to reduce China's trade surplus, why not rely on higher wage growth in China? In the long run, exchange-rate appreciation and money wage growth are substitutes. By 2011, China was beginning to experience labor shortages as older workers retired and the supply of younger workers was diminishing due to the country's one-child policy. Restrictions on the migration of people from inland farms to coastal cities, where factories are clustered, have also contributed to labor scarcities. Indeed, pressuring China to appreciate its yuan may backfire. If Chinese employers fear that the yuan will appreciate in the future, which would reduce their international competitiveness, they will become reluctant to grant large wage increases in the present.

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Status NEW Posted 12 Jul 2017 01:07 AM My Price 12.00

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