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6 Aug, 2019 13:03

Pot calling the kettle black? US accuses China of currency manipulation... but what does that mean?

Pot calling the kettle black? US accuses China of currency manipulation... but what does that mean?

On Monday, the United States government officially labeled China a ‘currency manipulator.’ But all countries manage their own national currencies. Here’s a quick explainer of what this means.

How does a country control currency?

Government central banks control currency by regularly setting interest rates, through issuing new bank notes, and managing foreign currency reserves. National regulators also manage currencies on the open market to weaken or strengthen the exchange rate if the market price rises or falls too quickly.

Which countries manipulate their currency?

In effect, all countries manipulate their currencies in one way or another. Recent examples include Quantitative Easing programs by the US, the European Union, Japan, and others, in the years following the 2008 financial crisis. Hundreds of billions in new currencies have been issued to prop up local stock markets and buy government debt. Why is that currency manipulation? The answer is devaluation. The more money you print, the less it is worth.

How does a country manipulate currency?

Simply explained, in order to weaken its currency, a country sells its own currency and buys foreign currency – usually euros or US dollars. Following the laws of supply and demand, the result is that the manipulating country reduces the demand for its own currency while increasing the demand for foreign currencies.

Why would a country want to weaken its currency?

A country may want to weaken its currency in order to manufacture domestic goods more cheaply and make them more competitive on the global market. The US has accused China of doing just that in response to recent tariff hikes on Chinese goods. A weaker yuan helps Chinese exporters deal with higher tariffs. The downside is that imported goods become more expensive for Chinese consumers.

How does China manipulate its currency, according to the US?

The Chinese currency, called the renminbi or the yuan, is what the US calls a policy currency. So according to Washington, this means that, unlike the US dollar, which rises and falls in value in free market trading, the yuan’s value against the dollar is set by the People’s Bank of China, an arm of the Chinese government.

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