Even if China allowed the yuan to float, what would cause the value to rise considering China's closed econ?
Answer:
China's economy is not close - both exports and imports are huge.
And they are not controlled by government either.
So yes, if they end yuan peg on dollar, it will appreciate.
The yuan is currently pegged to the US dollar. There is a tremendous demand for the yuan -- that is, people want to sell US dollars and buy yuan. The Chinese government keeps the value of the yuan from appreciating by buying US dollars and selling yuan. If the government decides to let the yuan float, they will no longer be buying US dollars. This will mean the yuan will appreciate, and the US dollar will depreciate.
For more information, see:
http://www.uscc.gov/hearings/2005hearing...
The yuan is not pegged to the dollar, it is now pegged to a basket of currencies which allowed it to appreciate slightly. Granted the dollar is still in there.
I just recently read a small section in my text that said many economists believe the release of thier currency could cause the dollar to depreciate by as much as 50% because of their large holdings in it.
They keep their currency undervalued because of their very open economy especially when it comes to exports, which is why there currency is undercalued. If you look at something called PPP purchasing power parity it kind of gives you an idea of what a throretical exchange rate should be.
Quick example a coke costs $1 or .5 pounds if this were true disregarding all other factors according to PPP the exchange rate would be $1=.5 pounds
That is far oversimplified but i hope it clears up your question somewhat.
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