After years of economic growth, China’srenminbi currency, also called the “yuan”, has been added to the list of elite globalcurrencies by the International Monetary Fund.
Alongside the dollar, euro, pound, and Japaneseyen, the renminbi is officially recognized by the IMF to be safe, reliable and freelyusable.
However, despite this designation, China has been known to practice currencymanipulation in an effort to influence the value of the yuan.
So what does that meanexactly? How does China manipulate its currency? Basically, currency manipulation is the waycountries attempt to avoid the negative market effects of having a strong currency.
The valueof a currency is essentially dependent on how much or how little it is used, which inturn is dependent on how strong a country’s trade balance is.
When China has a trade surplus,people in other countries basically have to buy Chinese currency in order to buy Chinesegoods.
With an increase in demand, the price, or “value” of the currency goes up.
However, as currencies get stronger, it becomesmore expensive to purchase goods.
Other, cheaper currencies become more advantageous to spend.
In a way, currency itself can be viewed as a product, whose price is based on demand.
As China has seen rapid and intense economicgrowth, they’ve attempted to stem the inevitable devaluation of their currency as their tradesurplus grows.
This is done through currency manipulation, which is when one currency isused to buy huge amounts of foreign currency.
That makes it possible to prevent the currencyfrom gaining too much value, while also bolstering other currencies as well, and keeping themfrom becoming too competitively cheap.
So, how does this work in action? Accordingto Economic Policy Institute, China spent half a trillion dollars in 2013 alone purchasingforeign currencies.
This was likely to prevent the value of the yuan from making manufacturingin China less profitable, while attempting to cheapen the US dollar.
This type of manipulation around the worldis thought to cost the US between 2.
3 and 5.
8 million jobs, as well as hundreds of billionsin trade deficit.
Like all trade relations, currency manipulation is an inherently selfserving and competitive move by many countries, although China is considered the biggest offender.
In August 2015, they devalued their currency by nearly 2% against the US dollar, forcingChina’s trade balance to favor exports over imports.
It also shook global markets andwas the country’s biggest one day drop in twenty years.
However, both the devaluation and the IMFdesignation mean that the yuan is now less controlled by the Chinese government.
As thecurrency sees greater scrutiny as an elite global medium, market forces will likely overpowermanipulation.
But in the end, China may have gotten what it wanted anyway, as the yuannow holds greater weight than either the pound or the Japanese yen.
Although it has far togo before rivaling the dollar, its growth seems inevitable.
China’s currency might have a huge impacton economies around the world; so how dependent is the world economy on China? Find out inour video.
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