Does China Manipulate Its Currency?

Does China manipulate its currency? This is a common question among investors, policymakers, and traders. China has been accused by some countries and financial experts of manipulating its currency, the Chinese Yuan (also known as Renminbi or RMB), to gain trade advantages and promote its economic interests. In 2019, the US officially declared that China was a currency manipulator. In this article, we will look at currency manipulation by China and whether it exists.

What is Currency Manipulation?

Currency manipulation, also known as exchange rate manipulation or currency intervention, involves deliberately influencing the value of a country’s currency in the foreign exchange market to achieve certain economic objectives. This manipulation can involve both direct and indirect methods, a country’s government or central bank, aimed at weakening or strengthening the currency’s value relative to other currencies. Manipulating currency is a controversial strategy since it can create imbalances in global trade and causes tensions among nations.

A country can artificially weaken its currency for various purposes, like boosting exports by making its exports cheaper in international markets, maintaining trade advantages as a weaker currency can lead to increased exports and decreased imports, protecting domestic industries, managing foreign debt by reducing the real value of its debt obligations, and ensuring stability by preventing excessive speculation in the foreign exchange markets.

On the flip side, a country can artificially strengthen its currency to reduce inflation, attract foreign investment, and protect the value of foreign assets.

What Currency Does China Use

It is easy to tell the currency of a country. The United States uses the dollar, while Australia uses the Australian dollar. China is a bit different. Indeed, the question of the currency China uses is one of the most common among newbies.

In short, China uses a currency known as yuan. The currency is locally known as the Renminbi. In local Chinese language, the renminbi is used to mean the money of the people. Therefore, there is no difference between the yuan and the renminbi. While the renminbi is the official currency, the yuan is the unit of account.

There is a paradox. Hong Kong is officially a part of China. However, Hong Kong uses its own currency, the Hong Kong dollar. The reason for this is that while Hong Kong is part of China, it is a self-governing region. It has its own central bank.

How the Chinese Currency Works

There is another paradox when it comes to the Chinese currency. On paper, the currency should be the most influential in the world. This is simply because of the power of China as the second-biggest economy in the world. More so, China is the biggest buyer and seller of most commodities.

However, the reality is that the country’s currency is not influential. Indeed, internationally, it is almost impossible to meet a person who carries the renminbi. The currency is not one of the common currencies traded on forex because it’s the restricted currencies in the world.

This is because of how the Chinese central bank works. China’s central bank is known as the People’s Bank of China (PBoC), and is relatively different from its American peer, the Federal Reserve. It is different because of how it deals with the currency.

The PBoC is always in control of the yuan. Every day, it makes it to trade in a 2% range of a mid-point it places around the dollar every day. The mid-point used is usually calculated based on the movement of the previous day.

Therefore, the yuan is usually more controlled than other currencies. In addition to this, the country also controls the amount of foreign investment and the amount of money that moves from the country.

Indeed, it is this control that made the country intervene when its biggest companies were making huge investments around the world. For example, in 2014, Anbang acquired companies like Waldorf Astoria, VIVAT, and Fidea Verzekeringen among others. It was later taken over by the Chinese government.

Does China Manipulate Its Currency?

The answer to this question is a matter of debate. Some people believe that China does manipulate its currency in order to gain an unfair advantage in international trade. They argue that a weak yuan makes Chinese exports more competitive, which can hurt other countries’ economies.

Others believe that China does not manipulate its currency, or that it does so only to a limited extent. They argue that the yuan is not as weak as it is often made out to be, and that China’s economic growth is due to a number of factors other than currency manipulation.

How Does China Manipulate Its Currency?

Those who believe that China manipulates its currency cite several methods that China uses to do so:

• Currency peg: China has a managed currency peg, which means that the value of the yuan is loosely tied to the value of the U.S. dollar. PBOC, China’s central bank, sets a daily reference rate for the yuan, and then allows it to fluctuate within a narrow band around that rate. However, the PBOC can intervene in the foreign exchange market to buy or sell yuan to keep the currency within the band.
• Foreign exchange intervention: The PBOC can also directly intervene in the foreign exchange market by buying or selling yuan. This is a more direct way to manipulate the currency, and it is often used when the PBOC wants to quickly move the yuan in a certain direction.
• Domestic monetary policy: China’s domestic monetary policy can also have an impact on the value of the yuan. For example, if the PBOC lowers interest rates, this can make the yuan more attractive to investors, which can drive up its value. Conversely, if the PBOC raises interest rates, this can make the yuan less attractive to investors, which can drive down its value.
• Capital controls: Implementing restrictions on the movement of capital in and out of a country can impact the demand and supply of its currency.
• Export-led growth strategy: China has historically pursued an export-led growth strategy, where a weaker currency can make its exports more competitive in international markets.

These are not the only ways the Chinese government intervenes. The government is known to operate many state banks. It has full control of these banks and can easily manipulate the state of the currency.

Does China Manipulate Its Currency?

The answer to this question is a matter of debate. In reality, this question has two answers. There are those who believe that there is currency manipulation by China and those who believe it doesn’t. In general, the United States has put three criteria that it uses to identify whether a currency is a manipulator. First, the country must be running a big trade surplus with the US. Second, it must have an overall big current account surplus. Finally, it must have a one-sided intervention in the forex market to depress the value of its currency. Therefore, there are some who strongly believe that China manipulates its currency and those who don’t.

In anticipation of a new trade agreement between the United States and China in 2020, the U.S. made a concession to Beijing by removing China from its list of currency manipulators.

China has more control over its currency than most countries. This is because China is a communist country, where the party and president has influence over all branches of government. The PBoC and the state banks have a lot of power over the movement of the currency. Therefore, there is some evidence of currency manipulation in China.