Floating the Exchange Rate: In Pursuit of the Chinese Dream

Case Solution

Laura Alfaro, Sarah Jeong
Harvard Business School ()

In the decades after 2005, China faced significant financial challenges. The inflation spiral increased and China’s economy stagnated in the wake of the global financial crisis. The country’s leaders took an interventionist approach to weather the storm by controlling capital and exchange rates. These actions drew criticism from other nations and, in 2017, the United States launched the trade wars between the United States and China that imposed tariffs and transparency requirements. With the effects of the trade wars uncertain, many wondered if the central bank would take more discreet steps to change the yuan. Would the Chinese currency appreciate against the US dollar as much as economists predicted? And when would there be more changes? The stakes were high; A freer yuan float would affect groups inside and outside China very differently. Would China’s currency depreciate or appreciate if fundamentals so dictated?

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