Read the case study and give detailed answers for the questions provided:

WEEK 4 CHAPTER CASE: A Weak Dollar Versus a Strong Yuan

The value of the US dollar is a trillion-dollar question. In terms of international trade competitiveness, a strong dollar may make it harder for US firms to export and to compete on price when combating imports. Conversely, a weak dollar may facilitate more US exports and stem import growth.

The dollar is often compared to China's yuan, which, according to US critics, is pegged to the dollar at an "artificially low" level (maybe up to 40%). A cheap yuan is thus behind the formidable competitiveness of China's exports. The US government argues that the yuan needs to appreciateor to be made "stronger." However, the issue becomes complicated when one realizes that over 60% of "Chinese exports" are not produced by Chinese-owned firms but by foreign-invested enterprises producing in China. Wal-Mart, for example, sources from 5,000 non-Chinese-owned suppliers manufacturing in China. Therefore, US firms such as Wal-Mart that benefit from the cheap yuan actually do not necessarily support the US government's efforts to let the yuan appreciate.

Officially, China abandoned the yuan's peg at 8.3 yuan per dollar in 2005. While the peg was reintroduced in 2008 to combat the economic crisis, it was abandoned again in June 2010. Since then, the pace of yuan appreciation has gathered steam, reaching 6.5 yuan per dollar in 2011. The appreciation has been carefully managed by the People's Bank of China (PBOC, the central bank), and has not been allowed to rise by 0.5% on any given day.

The debate on the exchange rate between the dollar and the yuan is part of the global debate on the proper valuation of the dollar. In the words of Valry Giscard d'Estaing, former French president, the dollar enjoys "an exorbitant privilege." US firms are spared the hassle of having to transact in a foreign currency. The dollar reserves in other countries such as China enable the United States to borrow at a lower cost. The US government can print money at will (known with a euphemism as "quantitative easing"), with negative ramifications around the world.

The dollar's dominance stemmed from US economic strengths after World War II. Some critics argue that at present, the dollar punches above its weight, since the US share of global output (20%) and trade (11%) is shrinking. In addition to debating what the "fair" value of the dollar is, a new voice is now calling for abandoning the dollar as a reserve currency.* Leading this new movement is China. China is America's number one creditor country, holding about $2.2 trillion in foreign exchange reserves, two-thirds of which are denominated in dollars. Since the yuan is not internationally accepted (technically non-convertible), China does not suggest that the yuan be used to replace the dollar. Instead, it has proposed to use Special Drawing Rights (SDRs), already created by the IMF, as a global reserve currency. While this proposal is made in the name of promoting global stability, China is not totally altruistic. Since the US budget deficit has exploded and a ton of new money has been printed to fund stimulus packages, China is deeply worried that a cheapening dollar will be a nasty hit to Chinese holdings of US Treasury bonds. There is some fundamental soul-searching among Beijing's economic mandarins. Their policy of keeping the yuan low versus the dollar to promote exports and then to recycle export earnings to buy US Treasury bonds has backfired. Even the typically timid state-controlled media in China is now full of criticisms of the government's "irresponsible" investment policy, which ends up investing hard-earned dollars from a developing economy to subsidize a very rich economy. China's proposal to dethrone the dollar as a dominant currency, although clearly a long shot, quickly garnered support from Russia and Brazil. In 2009, the United Nations Conference on Trade and Development issued a supportive opinion:

"An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run up to the financial crisis."

The United States, on the other hand, has every interest to keep the dollar's status quo as the world's (de facto) reserve currency so that surplus countries will keep buying Treasury bondsfor lack of a better alternative. While China continued to buy new Treasury bonds, it recently took two concrete steps. First, China arranged more than $120 billion in currency swaps with trading partners such as Argentina, Indonesia, Malaysia, and South Korea. The PBOC will make yuan available to pay for imports from these countries if they are short on dollars. Second, China started to use yuan to settle certain transactions with Hong Kongthe first step for the yuan's long march toward international convertibility. By 2011, trade worth $58 billion (385 billion yuan) had been settled in yuan.

* Technically, since the demise of the Bretton Woods system in the early 1970s, the US dollar is no longer the official reserve currency of the world. However, the dollar, due to its soft power, has often been treated as the de facto reserve currency.

Sources: "China's doubts about the dollar," BusinessWeek, 8 June 2009, 20; "Learning to crawl," Economist, 26 June 2010, 75-76; "Stranger than fiction," Economist, 22 January 2011: 85-86; "The rise of the redback," Economist, 22 January 2011, 14-15; B. Eichengreen, Exorbitant Privilege (New York: Oxford University Press, 2011); "UN panel calls for dollar reserve role to be eliminated," Wall Street Journal, 8 September 2009.

Give detailed answers to the following questions:

1. Why is the value of the yuan relative to the dollar so important? 2. If you were the CEO of Wal-Mart and were preparing for a meeting with the most vocal members of the US Congress on China's currency "manipulation," what would you say to them? 3. Assuming that the yuan will appreciate further against the dollar, what should Wal-Mart do? 4. If you were an exporter from Argentina, Indonesia, Malaysia, or South Korea and selling to China, would you accept payment in yuan (instead of dollars)?