How does china manipulate its currency

There was also another motive for China's decision to devalue the yuan—China's determination to be included in the International Monetary Fund 's IMF special drawing rights SDR basket of reserve currencies. The SDR is an international reserve asset that IMF members can use to purchase domestic currency in foreign exchange markets to maintain exchange rates.

In , the yuan was rejected on the basis that it was not freely usable. The IMF welcomed the devaluation, encouraged by the claim that it was done in the name of market-oriented reforms.

Consequently, the yuan became part of the SDR in Within the basket, the Chinese renminbi had a weight of As currency rates and interest rates are interlinked, the cost of borrowing from the IMF for its member nations would now hinge in part on China's interest and currency rates. That provided evidence that the government's slashing of interest rates and fiscal stimulus had not been as effective as hoped. Thus, skeptics rejected the market-oriented-reform rationale.

Instead, they interpreted the devaluation as a desperate attempt to stimulate China's sluggish economy and keep exports from falling further. China's economy depends heavily on its exported goods. By devaluing its currency, the Asian giant lowered the price of its exports and gained a competitive advantage in the international markets.

A weaker currency also made China's imports costlier, thus spurring the production of substitute products at home to aid domestic companies. The U. Some believed that China's devaluation of the yuan was just the beginning of a currency war that could increase trade tensions. Although a lower-valued yuan would give China somewhat of a competitive advantage, trade wise, the move was not wholly counter to market fundamentals.

Over the past 20 years, the yuan had been appreciating relative to nearly every other major currency, including the U. However, China's economy had slowed significantly in the years before the devaluation. On the other hand, the U. Understanding the market fundamentals clarifies that the small devaluation by the PBOC was a necessary adjustment rather than a beggar-thy-neighbor manipulation of the exchange rate. While many American politicians grumbled, China was actually doing what the U.

While the drop in the yuan's value was the largest in two decades, the currency remained stronger than it had been in the previous year in trade-weighted terms. Currency devaluation is nothing new. From the European Union to developing nations, many countries have devalued their currency periodically to help cushion their economies. However, China's devaluations could be problematic for the global economy. With Chinese goods becoming cheaper, many small- to medium-sized export-driven economies could see reduced trade revenues.

If these nations are debt-ridden and have a heavy dependence on exports, their economies could suffer. For instance, Vietnam, Bangladesh, and Indonesia greatly rely on their footwear and textile exports. These countries could suffer if China's devaluations make its goods cheaper in the global marketplace.

For the Indian economy , a weaker Chinese currency had several implications. As a result of China's decision to let the yuan fall against the dollar, demand for dollars surged worldwide. That included India, where investors bought into the greenback's safety at the expense of the rupee. The Indian currency immediately plunged to a two-year low against the dollar and remained low throughout the latter half of The threat of greater emerging market risk due to the yuan devaluation led to increased volatility in Indian bond markets, which triggered further weakness for the rupee.

Usually, a declining rupee would aid domestic Indian manufacturers by making their products more affordable for international buyers. However, in the context of a weaker yuan and slowing demand in China, a more competitive rupee is unlikely to offset weaker demand going forward. Additionally, China and India compete in several industries, including textiles, apparel, chemicals, and metals.

A weaker yuan meant more competition and lower margins for Indian exporters. It also meant that Chinese producers could dump goods into the Indian market, thereby undercutting domestic manufacturers. India had already seen its trade deficit with China nearly double between to and to On the flip side, falling commodity prices made it much more difficult for Indian producers to remain competitive.

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Frequently Asked Questions. Contact OFAC. Financial Literacy and Education Commission. Innovations in Financial Services. Featured Research. Exchange Stabilization Fund. Meanwhile, declining unemployment and underemployment, with rising labour force utilization, have improved wage remuneration and working conditions, eroding into profits from previous, largely uncompensated labour productivity increases. Savings, investments and growth have thus declined as domestic consumption has risen.

Excessive RMB appreciation over the last decade has thus slowed rapid Chinese growth, but its modest depreciation after may not reverse this adverse effect sufficiently. The story has changed Contrary to the popular narrative of a continuously and deliberately weakened RMB exchange rate, China was forced by US-led international pressure to reverse RMB undervaluation almost two decades ago.

Higher incomes, reduction of earlier fast-rising income inequalities and the stronger RMB have significantly increased Chinese mass consumption, with less left for corporate profits, savings and investments, as slowing Chinese growth over the last decade suggests. All rights reserved.