China: To Float or Not to Float (A) Harvard Case Solution & Analysis

July 21, 2005 China to revalue its decade of quasi-fixed exchange rate of about 8.28 yuan per U.S. dollar by 2.1% to 8.11%, and at the same time, introduced a more market-based exchange rates. Many analysts and economists were disappointed that they perceived little change, and called for greater flexibility in the dollar / yuan exchange rate. Modification of the exchange rate regime of China has been long-awaited and much discussed in the previous months, China's trade surplus with the United States reached a record high, and the friction with Europe and Japan. In addition, analysts say that the tightly managed exchange rate, a strain on China's own economy. Not only is the rate of exchange expensive to maintain, but it helped - and limited flexibility in response to China - a potentially overheating economy. Although China has vast control over the movement of capital in the country contributed to counteract some of the inflationary pressures, control becomes more porous, as China is increasingly integrated into the global economy. It still was not clear that China will eventually decide to do with their exchange rate regime. "Hide
by Laura Alfaro, Rafael Di Tella, Ingrid Vogel Source: HBS Premier Case Collection 30 pages. Publication Date: Mar 02, 2006. Prod. #: 706021-PDF-ENG

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