Chinese Yuan vs. US Dollar Essay Example | Topics and Well Written Essays - 2000 words

Chinese Yuan vs. US Dollar - Essay Example The use of the two currencies in trade began in 1985 on a bilateral arrangement between the two countries. In 2008, the volume of imports from China hit the $337.8 billion mark. The China government has increased the use of the Yuan in foreign trade over the years leading dynamism in its exchange rates with other world currencies. According to economists, the China government is suspected to devalue the currency in order to increase the competitiveness of their local industries. In addition, the Chinese Yuan is less flexible with respect to the exchange rate against the US dollar and other world currencies. An effort to increase the flexibility of the Chinese Yuan by the government has resulted to the use of the currency internationally. The objective is increasing the use of the currency and achieving its use as a reserve currency in the long term (Derosa 2011). The last five financial years indicate a relatively stable exchange rate between the Chinese Yuan (CNY) and the US dollar (USD). The table below indicates the official exchange rates posted in the two countries’ markets. The record shows how much one US dollar is equivalent to the Chinese Yuan Year USD Chinese Yuan 2009 1 6.8314 2010 1 6.7703 2011 1 6.4615 2012 1 6.3123 2013 1 6.1910 Since 2009 to date, the value of the Chinese Yuan has been increasing. ... changes in the exchange rate can be attributed to the control efforts of the Chinese Yuan flexibility in the exchange market by the Chinese government (Exchange-Rates.org 2013). From 2005 to 2008, the Chinese government allowed the appreciation of the dollar to 21%. However, the global economic crisis prompted China to stop the appreciation and regulate the exchange rate flexibility. From 2008 to 2010, the exchange indicated minimal changes since the rate was maintained at about 6.83 Yuan (Exchange-Rates.org 2013). Amid the then economic conditions, the Chinese government continued with their reforms in the exchange rate thus increasing the currency’s flexibility again. This led to an appreciation of the exchange rate leading to a loss of value by the Yuan against the dollar. The controlled flexibility of the Yuan leads to a slowed appreciation of the dollar against the Yuan. The slight change in the exchange rate of these currencies is caused by the fixed exchange rate regime maintained by China with regard to their currency. The depreciation of the US dollar over the years also contributes to the decrease in the exchange rate between the CNY and the USD. The USD has lost value against the Yuan and other major currencies across the world especially during the global financial crisis. The Chinese Yuan/US dollar exchange rate in 2012 portrayed several movements that ranged between an increase and a decrease in value of the Yuan against the dollar and the loss of value of the dollar against the Yuan. The table below shows the values of the exchange rates between the Yuan and the dollar. The values are on quarterly basis with the USD as the base currency (Wang 2009). Month (2012) USD Yuan January 1 6.6233 April 1 6.3077 August 1 6.3604 December 1 6.2223