Assignment 2: Case Analysis (Chinas Renminbi: Our Currency, Your Problem)1) Recap the different arguments used by the U.S. and Chinese governments about the renminbi. US Government1. Government of United States of America accused the undervaluation of Yen and threatened to block Japanese imports if Yen were not revaluated.2. US Officials continued to put extra pressure on the revaluation of Yen even when Chinese currency was at 7.2% against dollar.Chinese Government:1. Officials from china said that US is pushing for the revaluation of the currency because of its own trade and budget deficit. 2. Chinese officials said that they adopted the peg to for the betterment of countrys own economic environment and for the betterment of its own partners.3. Chinese government clearly said that currency is not undervalued and changes in the currency values has no relation between external pressures. 4. Government officials mentioned that as a sovereign country, China can chose the exchange rate policy

3. Why are Japan, the newly industrialized economies (NIEs) and developing Asian countries less vocal than the US on the valuation of the renminbi? Ans 2: Japan and other Newly industrialized economies (NIE) were less vocal than US because they were strengthening there economics ties with China. These countries produced the parts in their own countries and assembled the complete product in china because of the availability of the cheap labor. Major part of the export and import of these countries (including China) was by Processing Trade. This type of trade was mutually beneficial for both the countries.4. Do you think the renminbi is undervalued against the US dollar? How can China maintain the exchange rate of the renminbi? Ans4: Yes the Renminbi has been undervalued because of the fact that even though china has excess of trade surplus ($101.9 Billion) and FDI inflow has been increasing (from $53.5 Billion in 2003 to $63 billion in 2006) over the years, its currency value has not appreciated. It was expected that value of Renmibi should have appreciated in the fixed basket as the value of dollar and Euro depreciated during this period. Main reasons for undervaluing the currency is the generation of employment and also by appreciation of RMB the Chinese products will become uncompetitive in the market.

China maintains the exchange rate of the renminbi by keeping the value of its currency low so that exports can boost. Chinese government believes that keeping a constant exchange rate keeps the growth rate high and as china`s growth depends largely on its exports, stable rate decreases the uncertainty of exchange rate for foreign partners and investors.

5. Why does the Chinese government want to keep its currency at an artificially low level against the US dollar? 6. Exchanging all of Chinas US dollars for renminbi can lead to inflationary pressure. How does China avoid this risk? 7. Why, despite the huge US trade deficit, has the US dollar not fallen? Do you think there is a risk of this happening? 8. What would be the consequences of a revaluation for China, western countries, Japan, NIEs and developing countries?