Different currencies are used within countries of the world, and the exchange rate system determines their value. Thus, a particular approach selected by the government establishes the way in which the value of the currency is specified. Among three existing exchange rate systems – fixed, floating, and managed, China tends to apply the first one, also called paid system. Usage of this approach to determining the exchange rate suggests that the currency’s value is fixed against another currency. The paid system allows economies prone to instability to prevent inflation and avoid market panic. Such reasons as prevention of inflation and panic and the fact that a fixed system helps keep exports cheap and foreign products expensive push China to use it. Moreover, paid system contributes to maintaining trade balance in favor of the country.
The question of whether China keeps its currency artificially low is controversial among economists. On the one hand, this approach helps the country to maintain its position in foreign markets, but on the other hand, it creates the image of a currency manipulator for it on the international stage. I agree that China is taking this approach to maintain the national economy. Since its economic reform, known as the Opening of China in the middle of the last century, the government has had a strong influence on the country’s economy. The cheapness of their export products evidences the artificial maintenance of the currency. Moreover, the understatement of the currency can be viewed as protectionism towards the national products. The expansion of export-oriented production allows more people from both cities and provinces to receive a job. Thus, China, when choosing the exchange rate system, is guided by the motives of protecting the national product and not the opinion of other governments about manipulations.