Should China adopt a flexible exchange rate regime Essay

Should China adopt a flexible exchange rate regime - Essay Example United States of America is one of the key trading partners with China. However, there has been controversy surrounding China and its trading partners. China is blamed for not opening fully its vast domestic market to other foreign trading partners through its currency devaluation, fixed exchange rate regime and tighter import regulations. China has to make painful decisions on whether to allow its currency to appreciate or not. In addition, it has to choose from maintaining its fixed currency exchange rate regime or adopting a flexible exchange range regime. By studying its economy and listening to the concerns of its trading partners, China will be in a position to make decisions that best suit its interest as well as those of its trading partners. If China chooses maintain a devalued RMB, it will generate more wealth at the expense of its trading partners. Why China chooses to keep its currency artificially low compared to it trading partners. There are many reasons why China woul d wish to maintain artificially low currency as compared with those of its trading partners, especially against the dollar of the United States of America. According to James (2010) China wishes to maintain artificially low RMB exchange rate to other currencies of major trading partners in its interest. Federal Reserve (1999) revealed that a country devalues her own currency when it does not have sufficient foreign reserves or unwilling to spend foreign exchange reserves to maintain its exchange rate to foreign currencies. China is among the richest countries with high level of foreign exchange reserves in the world. However, it seems China has different ambitions and is unwilling to spend its foreign exchange reserves to keep RMB at a rate appropriate against the dollar. There are many genuine and valid reasons, which make China keep its currency artificially low. The first reason why china wants to maintain its devalued currency is because it wishes to maintain high levels of expo rts. By keeping its currency low, China is able to make its currency cheaper in relation to other major currencies. As a result, it makes its products and services cheaper to customers (consumers) in foreign countries. This will ensure that China continues to exports a lot of goods and services to other countries. China’s currency devaluation approach is consistent with foreign exchange theory that stipulates that that the lower the currency in relation with those of other trading partners, the lower the prices of exports hence a country will be able to export more. Higher exports as compared to imports will enable China to generate trade surpluses and build even more reserves of foreign currencies. The second reason why china wants to keep its currency low is to discourage its domestic consumers from purchasing imported goods and services. China’s artificially low currency will make foreign goods and services more expensive as compared to similar goods and services pr oduced in China. Devaluated currency discourages imports and China will be able to control quantity and value of imports entering its borders. When a country increases consumption of domestic goods and services, it keeps its factories running (Saccomanni, 2008). Therefore, the country is able to maintain its employment levels and even increase employment rates with increase in domestic consumption. Furthermore, by reducing the number of imports, China will be abl