China's Renminbi What Will Be Case Study

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While at the same time, it will make imports in Hong Kong / China cheaper in relation to goods that are manufactured in both locations. Over the course of time, this will cause the trade surplus that Hong Kong / China enjoys decreasing as both markets begin to buy the cheaper foreign imports. ("The Impact of China's Revaluation of the Yuan," 2005)

Yet, both Hong Kong and China are facing a similar situation as Japan, due to the fact that they rely heavily on foreign trade. Where, many of the different markets are somewhat open to exports, with restrictions. This is similar to a policy that Japan engaged in during the 1970's and 1980's, where once the peg was removed off of the U.S. dollar, the yen appreciated in value. Under normal circumstances, this should have solved Japan's trade surplus problems. However, because their markets were still restrictive to foreign imports, meant that the country would begin to see their trade surpluses become smaller. This would cause the Bank of Japan to engage in an easy monetary policy, in an effort to continue to encourage large amounts of investing.

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At which point, this would fuel a bubble in the real estate and the stock markets. Once this took place, it meant that exports and imports would decline considerably. This is because the central government attempted to maintain the affects of having the currency pegged to the U.S. dollar. A similar situation could occur in Hong Kong, where once the currency is allowed to float freely. The central government will more than likely attempt to maintain the positive benefits that it enjoyed for so long. The problem with engaging in such a policy is: that you are artificially trying to regulate the forces of supply and demand. If actions, such as a predetermined rate are left in place to long, this pent up demand will increase the value of the Hong Kong dollar dramatically (once it is allowed to float freely). This will cause the trade surplus to decline as many expensive imports are now affordable, while the total number of exports will become more expensive on foreign markets. (Fung, 2007).....

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