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. Thanks for watching TestTube News!

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