After years of economic growth, China’s renminbi currency, also called the “yuan”,
has been added to the list of elite global currencies by the International Monetary Fund.
Alongside the dollar, euro, pound, and Japanese yen, the renminbi is officially recognized
by the IMF to be safe, reliable and freely usable.
However, despite this designation, China has been known to practice currency manipulation
in an effort to influence the value of the yuan.
So what does that mean exactly?
How does China manipulate its currency?
Basically, currency manipulation is the way countries attempt to avoid the negative market
effects of having a strong currency.
The value of a currency is essentially dependent on how much or how little it is used, which
in turn 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 Chinese goods.
With an increase in demand, the price, or “value” of the currency goes up.
However, as currencies get stronger, it becomes more 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 economic growth, they’ve attempted to stem the inevitable
devaluation of their currency as their trade surplus grows.
This is done through currency manipulation, which is when one currency is used to buy
huge amounts of foreign currency.
That makes it possible to prevent the currency from gaining too much value, while also bolstering
other currencies as well, and keeping them from becoming too competitively cheap.
So, how does this work in action?
According to Economic Policy Institute, China spent half a trillion dollars in 2013 alone
purchasing foreign currencies.
This was likely to prevent the value of the yuan from making manufacturing in China less
profitable, while attempting to cheapen the US dollar.
This type of manipulation around the world is thought to cost the US between 2.3 and
5.8 million jobs, as well as hundreds of billions in trade deficit.
Like all trade relations, currency manipulation is an inherently self serving 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, forcing
China’s trade balance to favor exports over imports.
It also shook global markets and was the country’s biggest one day drop in twenty years.
However, both the devaluation and the IMF designation mean that the yuan is now less
controlled by the Chinese government.
As the currency sees greater scrutiny as an elite global medium, market forces will likely
overpower manipulation.
But in the end, China may have gotten what it wanted anyway, as the yuan now holds greater
weight than either the pound or the Japanese yen.
Although it has far to go before rivaling the dollar, its growth seems inevitable.
China’s currency might have a huge impact on economies around the world; so how dependent
is the world economy on China?
Find out in our video.
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