Question

Discuss float exchange rates, and describe the current system that China is using to valuate their currency. Add comments on how this is affecting world trade.

Answer 1

Floating exchange rates refer to an exchange rate system which is governed by the principles of demand and supply and all exchange rates are decided according to these market forces.

China used to previously have a fixed exchange rate system wherein it fixed the rate to the dollar as 1$ = 8.28 RMB. However, it presently operates under a pegged float or managed float system because its fixed exchange rate policy came under severe criticism from its major trading partners. In a managed float system, the regulatory authority( generally the Central Bank of the respective country) can intervene in case of fluctuations in exchange rates or to suit its own advantage.

The value of China's currency is observed by economists to be severely undervalued, a policy which China has undertaken so as to keep its exports competitive. This ensures that Chinese exports are valued highly in the world trade market thus killing other competing countries in the line and ensuring that exports do not slow down at any cost.