Case Study Example | Topics and Well Written Essays - 750 words - 1

Case Study Example While this move is anticipated to benefit China’s trading partners, since they will be in a position to reap the benefit of a flexible currency exchange rate, which includes increasing the value of their exports to China, there is some dissent view amongst some economists, that doing that will have a negative implication on China and consequently on its trading partners (Alfaro and Tella, 7). On the event that China would make its currency exchange rate more flexible, a high rate of deflation will be experienced in China, which would result to economic decline. This is because; making the exchange rate flexible would mean that the Chinese currency will lose some value relative to other currencies, such as the US dollar. This would mean that the cost of doing business in china will increase, since the multinational corporations and other foreign investments to china will be force to cater for the cost of increased inflation. This might result to having most of the foreign inves tments or the multinational companies moving out of the Chinese market, and seeking to invest in other countries, where the cost of doing business will be relatively lower (Alfaro and Tella, 18). ... The Chinese economy operated under the principles of communism, until reforms were introduced to make it a socialist economy, with private ownership of property and increased reforms in agriculture, state-owned enterprises, banking sector, trade and foreign investment policies, which saw China increase its GDP growth by 9.5% annually, and increase its trade from 10% of GDP to 79% of GDP between 1978 to 2004 (Alfaro and Tella, 15). The most significant change was in foreign investment policies, where China pursued policies that allowed for high foreign investment, resulting to having 50% of Chinas exports being produced by foreign investors by 2004 (Alfaro and Tella, 16). China pursued foreign direct investment into its economy more than borrowing loans, an aspect that saw the FDI account for more than 70% of its capital inflow in the early 2000s. However, the pressure of investment into china reached to a position of imbalance with the household consumption, prompting the Chinese gov ernment to slow down its pursuit for investment, to encourage household consumptions, so that the pressures of investment and consumption would level off. Thus, as opposed to focusing on revaluing the exchange rates, the Chinese government started focusing on domestic policies that would enhance consumption starting 2005 (Alfaro and Tella, 22). Both the domestic policy and the exchange rate revaluation have the impact of increasing deflationary pressure, while increasing the cost of doing business for foreign investors. This calls for a further adjustment to such businesses, which may include increasing their sales in China to cover up for the increased costs, or shifting their businesses to other countries which have less cost of doing business. Therefore, as much as there