Question

4. Why do you think the Chinese government originally pegged the value of the yuan against the U.S. dollar? What were the benefits of doing this to China? What were the costs? What do you think the Chinese government should do? Let the float, maintain the peg, or change the peg in some way?

Answer 1

Chinese government originally pegged the value of the Yuan against the US dollar to get the pricing advantage for its exports in the international market. Chinese government kept Yuan to be undervalued for the long time to promote the export and put the lower price so that it works to the advantage of the Chinese exports. Further, once the US dollar is converted into the Yuan, the Chinese enterprises will get more number of Yuan due to its undervalued forex rate against the US dollar.
It has the benefits of price advantage in the international market and exports can be done at a lower price. Hence, it promoted the exported. The costs are the costlier imports and relatively more number of Yuan had to be paid to get the imports. It would negatively affect the BOP of the China.
China is export oriented nation and one of the largest exporter of manufactured goods across the world. It requires competitive pricing and it can be achieved by pegging the Yuan as undervalued currency against all the major currencies of the world. So, the government should follow the pegging of the Yuan with regular revision (changing the peg on a regular interval) to maintain the competitive advantage in the international market. The regular revision also prevents the hostile reaction from the other exporting nations that are directly competing against the China.