Respond to this students discussion response: If China decides to sell the Treas

Question

Respond to this students discussion response:

If China decides to sell the Treasuries because of revaluing the Yuan, they could lose $130 billion. So this event is not likely to happen. At the present state the US is certainly feeling the affects of the current situation by expensive exports into China and the subsequent limited export growth. Jobs by the hundreds of thousands are also relocated out of country. But, forcing China to change their currency policy can have some negative impacts. They can drag their feet on going out on their own currency system. A trade war between 2 superpowers could also start causing financial panic, slowed global economic growth, and even a recession (Picardo, 2014). Reference Picardo, E. (2014). Why China's Currency Tangos with the US Dollar. Investopedia. Retrieved from http://www.investopedia.com/articles/forex/09/chinas-peg-to-the-dollar.asp

Explanation / Answer

From 1985 to 2008, U.S. exports to China have been equivalent to about one-third of China's exports to the U.S. So the Chinese peg to the dollar has been quite beneficial for China's exporting businesses. In addition, pegging the yuan to the dollar made investors much more confident in China's currency. Without the peg, China's economic rise would have been much slower because the yuan was nearly worthless compared to all of the leading economic nations of the world.

In particular, the Chinese accomplished its fast economic rise by pegging its yuan to the dollar at a very low rate. China does not price its currency based on interest rates because interest rates are not a monetary tool used by the Chinese, unlike other leading nations. Instead, China prices its currency based on Chinese banks' reserve requirements. Rather than appreciating or depreciating the yuan based on an interest rate, or allowing the yuan to float freely on the open market, the Chinese hold their currency price steady based on a fixed exchange rate regime. Increasing reserve requirements serves to reduce the amount of currency in the economy and decreasing requirements increases the amount of money available for use.

The problem from China's perspective is that appreciating the yuan could mean less foreign investment in China, deflation, lower wages and unemployment. Fewer exports will also diminish China's supply of dollars for investment, both inside and outside the country.

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