Balance of Payments in International Trade/Read Chapter 35 in Economics for Mana

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Balance of Payments in International Trade/Read Chapter 35 in Economics for Managers.

Read Chapter 35 in Economics for Managers.

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In the international environment, it is apparent that China is making large investments in the global financial markets in their shift away from exports. Is there a connection between China's exports and its financial investments in other countries? Your answer should mention China's current financial account.

Write a 500-word paper answering the question in Step 3.

Explanation / Answer

China is seen by some as a risk; but conversely, what effect does U.S. policy have on them? Right now, China is more susceptible to the shifts in U.S. monetary policy. But as they liberalize their exchange rate, it will automatically adjust to changes in situations around the world. This is a huge advantage and an automatic stabilizer. When China pegs to the dollar, they’re too linked to U.S. policy, so that when the U.S. tightens or loosens, they effectively follow suit. By allowing market-based influence, China will have a buffer when the U.S. economy is moving in a different direction than theirs. And that’s going to make it easier in the end for China to manage its economy.

An outside observer might ask why they haven’t done this already. I think that China was wary that unpegging would’ve interrupted the double-digit growth. When a country’s exchange rate and capital flows suddenly start shifting around dramatically, it can interfere with the ability to deliver on growth targets. As China’s growth targets have come down, and as they begin to shift away from an export-reliant economy, instead fueling itself via domestic consumption, they can start allowing their exchange rate to move—though again, it won’t be the free floating exchange rate.

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