Chinese Yuan The Powder Keg Currency.
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Chinese Yuan: The Powder Keg Currency
Summary
China's economy continues to be the fastest-growing globally, showing no signs of slowing down. As of 2006, its GDP reached $2.68 trillion USD, with a 2005 per capita GDP of approximately $1709 (or $7204 when adjusted for purchasing power parity). Despite being low by global standards, these figures are rising rapidly. Thanks to a robust export sector, China has enjoyed uninterrupted growth, even surpassing Canada as the largest importer to the US.
Article Body
China's economy is expanding at a remarkable pace, particularly through exports to high-consumption regions like the United States and the European Union. While primarily an exporter, China relies on imports mainly for oil. Many imports in these regions, such as textiles and toys, originate from China. This brings us to the crucial question: how does the Yuan fare in the global market?
For over a decade, China's currency was pegged at 8.28 Yuan per US dollar. This policy helped maintain China's competitive edge, allowing exports to remain cheaper than those from other countries, especially within Asia. However, due to pressure from the US, China adjusted the Yuan's value by 2% against a basket of currencies, which includes the US dollar, euro, Japanese yen, South Korean won, and smaller portions from the British pound, Thai baht, and Russian ruble.
Experts predict that the Yuan will increase by 5% annually against the US dollar based on GDP, trade ratios, public deficits, interest rates, and the economic outlook. Despite these adjustments, the Yuan is not yet a freely floating currency.
Should the Yuan begin floating freely, the US dollar?"and currencies from many European countries?"could devalue significantly. This shift could lead to inflation, as Chinese goods would potentially become 40% more expensive. Additionally, purchasing power in these countries would decrease, affecting their ability to import critical goods like oil. Currently, the fixed exchange rate benefits nations reliant on low-cost Chinese imports to sustain their economies.
Although China appears to be gradually increasing the Yuan's value, it is not yet ready to let it float freely. The government fears structural issues, such as joblessness, that could arise from an abrupt shift. If the Yuan eventually floats freely, global economies would need to brace for substantial changes. It would dramatically affect China's trading partners, potentially reducing the US's influence as an economic powerhouse.
Any insights, news, analysis, prices, or other information provided here serve as general market commentary and do not constitute investment advice. Forexplane.com disclaims any responsibility for losses or damages, including lost profits, arising from reliance on this information.
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