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
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