Yuan Re-evaluation
Yuan Re-evaluation is an important economic policy that concerns the and . The Yuan is the Chinese currency that used to be tied to the U.S. dollar but now is floated as a currency on its own. As a result of the re-evaluation, the economy will change for better or worse depending if the new evaluation goes up or down. In July of 2005, the Yuan was evaluated and changed by 2.5%
The Chinese economy is one of the biggest in the world and the depends heavily on it. Therefore when the Chinese economy changes, even by a little bit such as 2.5% it affects the economy dramatically. The change in the Yuan is also an end to the 11 year stability and tie that it had to the U.S. dollar, one of the longest time periods in the economic history between the two countries. Instead of tying the Yuan to the U.S. dollar, is tying it to a basket of currencies such as the Euro, Japanese Yen and Korean wan.
Analysts say this move gives more economic flexibility in case the economy is doing poorly. If this happens then China won’t be affected as much because their currency is no longer directly tied to the U.S. U.S. economists are also worried that China will stop buying as many Treasuries and less fixed income assets in the U.S. China has the second most Treasury bonds at $243 billion. When the Yuan was taken off the U.S. dollar, the treasuries value went down as well.
wants to be able to have a large reserve to keep its money stable. currently holds the second largest amount of reserves, valued at $711 billion. The reevaluation is also supposed to decrease foreign debt that many Chinese countries are in who have borrowed heavily in foreign currencies. The businesses that are supposed to be affected the most are the toys, textiles, shoes, and electronic products industries. The Yuan reevaluation could make production costs too high for these companies to operate in and they might move to another country where labor and costs are cheaper and where they could make larger profits.
Some of the biggest critics in the of the Chinese reevaluation say that the reevaluation isn’t likely to help the Chinese economy. As economist David Harnan states, “The Chinese currency has been changed so many times in its period of history that it will not be before long that the Chinese realize their new reevaluation is worthless.”
The Chinese currency had been pegged to the U.S. dollar at 8.28 Yuan per dollar. Now that the currency has been changed, it is anybody’s guess what will happen to the economy. The only thing that is certain is that this reevaluation will definitely help the Chinese as analysts expect to see a new flow of direct foreign investment into the Chinese economy.
Works Cited:
Asian Times. Erickson, Jim. “Speed Read: Yuan reevaluation.” May 16, 2005.
