ECO610 Discussion 1 Week 5 Economic Advisor

How would you advise the authorities to move the Yuan Reniminbi exchange rate using this information? What would be your advice on fiscal policy?

An account surplus indicates that a particular nation can lend to the rest of the world. In an instance where I was China’s economic advisor, I would have advised that the country sell treasury notes to increase the supply of money and increase other nations' debts, such as in United States debt, to weaken the dollar. An increase in the money supply weakens the dollar and strengthens the Yuan Renminbi exchange rate. As an economic advisor, I would advise China to hook the U.S. dollar and allow the currency to fluctuate within a fixed band. However, China’s construction of foreign exchange reserves has slowed down, and its current account surplus has decreased during the past few years. These developments have prompted some observers to assert that the RMB is no longer as inexpensive versus the dollar as it once was ( EvervCRSReport,2004 )

However, having a surplus account may not always have a positive outcome, especially from a domestic perspective. For instance, a surplus account is mainly attributable to low local demand and its competitiveness in export markets. Poor wage growth and stagflation have resulted from the country’s low domestic demand. When domestic demand declines and imports are limited due to a depreciating currency, current account surpluses can also result from a recession ( EvervCRSReport,2004). Although account surplus may not be positive from a domestic perspective, it may be increased by certain activities such as exports, incoming transfers and earnings on investments abroad. An account surplus may also indicate the next step a country may take, given that it acts as an indicator of a higher domestic demand for domestic products that can help create employment in the particular region. Conversely, it is ideal for China to reduce importation demand and consumer spending, which can hinder employment progress.

Reference

EveryCRSReport. (2004, December 7). China’s currency policy: An analysis of the economic issues. Every CRS Report - EveryCRSReport.com . https://www.everycrsreport.com/reports/RS21625.htmlLinks to an external site.