China Pegged Exchange Rates against the Dollar
Manipulating the currency value and exchange rates directly affects the international trade markets. The Chinese government understood this; thus, they decided to manipulate their Yuan against the dollar in a way that would help them control international trade. When the exchange rate is pegged at a certain point, it provides certainty for the businesses that are importing and exporting out of the country. The risk of exchange rate fluctuations is eliminated from the businesses, which allows them to plan better. Before the 2000s, the Chinese economy was not dependent on the global economy (Hill & Hult, 2019). Therefore, the government must have pegged the exchange rates to have better control over its internal markets.
The benefit of a fixed exchange rate is that it helps to promote the development of the economy. For instance, China’s strategy of fixing its exchange rate against the dollar was a good strategy to help the developing of the country’s economy. Pegging the exchange rate to a strong currency such as the U.S. dollar can help to reduce inflation. The United States currency grows with the growth of its economy. When a smaller economy’s currency is pegged to this economy, it will slide as the larger economy’s currency grows. This makes imports more expensive, leading to the development of local economies (Rose, 2011). However, fixed currency exchange rates can be hard to maintain. Pegging one currency to another can be very costly. A country must maintain very high foreign exchange reserves to be able to achieve this (Rose, 2011). Therefore, not many economies can achieve what the Chinese government has done with the Yuan.
References
Hill, C., & Hult, T., (2019). Global Business Today Asia-Pacific Perspective. McGraw-Hill Education.
Rose, A. K. (2011). Exchange rate regimes in the modern era: fixed, floating, and flaky. Journal of Economic Literature, 49(3), 652-72.
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Question 
China Pegged Exchange Rates against the Dollar
China’s Managed Float
Based on the textbook readings for this week, as well as additional research via the Capella Library and the Internet, respond to the following:
Why do you think the Chinese government originally pegged the value of the yuan against the dollar?
What were the benefits of doing this for China? What were the costs?
Support your position with one additional resource from either globalEDGE or the Capella Library.
You must use proper APA references and in-text citations to identify both the textbook and your additional resource.