Evaluation of China’s Former and Present Foreign Exchange System in Relation to Its Investment Opportunities and Risks

FACULTY OF BUSINESS AND MANAGEMENT

MAY 2011 SEMESTER

ASSIGNMENT TITLE:

EVALUATION OF CHINA’S FORMER AND PRESENT FOREIGN EXCHANGE SYSTEM IN RELATION TO ITS INVESTMENT OPPORTUNITIES AND RISKS

BBNG 3103

INTERNATIONAL BUSINESS

NAME : CHUO AI FEI

MATRICULATION NO : 870714605028002

IDENTITY CARD NO. : 870714605028

TELEPHONE NO. : 016 858 3381

E-MAIL : chuoaifei@oum.edu.my

LEARNING CENTRE : MIRI

1.0 INTRODUCTION 2

2.0 ENVIRONMENTAL SCANNING ANALYSIS 3

2.1 Investment Opportunities in China 3

2.1.1 Market Size 3

2.1.2 Infrastructure and Suitability of Operation 4

2.1.3 Availability of Resources and Cost 4

2.2 Risk of Investment in China 5

2.2.1 Uncertainty and Risk 5

2.2.2 Political Risk 6

2.2.3 Financial Risk 7

3.0 EVALUATION ON CHINA’S FOREIGN EXCHANGE SYSTEM 8

3.1 China’s Former Foreign Exchange System (Fixed Exchange Rate System) 9

3.1.1 Stable Currency, Higher Credibility and Independence to Fight Inflation 9

3.1.2 Promote Economic Growth through Increased Export 9

3.1.3 No Monetary Autonomy-Inflexible in facing Shocks 10

3.1.4 The Costs in Maintaining Excessive Foreign Reserves 11

3.2 China’s Present Foreign Exchange System- (Managed Floating Exchange System) 12

3.2.1 Some flexibility in the face of shocks 12

3.2.2 Monetary Independence to Curb Inflation and Asset Bubbles 12

3.2.3 Vulnerable to Speculative Currency Attacks 13

3.2.4 Band Definition is Difficult 13

4.0 SUGGESTION ON THE NEED OF CHINESE YUAN REVALUATION 14

5.0 APPENDIX 16

1.0 INTRODUCTION

China or its official name- People’s Republic of China (PRC) is currently the world’s most populated country. The population size is estimated to reach approximately 1.33 billion by July 2011 (Source: CIA World Factbook). Also, the population is at the growing rate of 0.493% (2011 est.) According to CIA World Factbook, some of the major cities in China has contributed to the large population size, such include Shanghai 16.575 million; Beijing...