Yuan- Does China Manipulate Its Currency ? - Eaglesinvestors

China’s economy is the biggest around the globe regarding purchasing power parity. Hence China wants its yuan to replace the U.S. dollar as the world’s currency. By doing so, China would get more control over its economy.

Therefore, as China’s economic might grows, it is taking steps to make that happen. Very few individuals of institutional investors see it as inevitable; however, they don’t say when. So should we see a shift from a greenback- to a redback -dominated world?

Can the Chinese Yuan replace the Dollar as the World’s Reserve Currency?

YuanThe level of trade in the U.S is not the only reason why the U .S. dollar is the world’s reserve currency. The power of the U.S. economy instills trust. Most importantly is the stability of its monetary policy and the transparency of U.S. financial markets.

Before China’s yuan become an international currency, it should first be successful as a reserve currency. This will give China the following benefits.

• All central banks would have to keep yuan as part of their foreign exchange reserves. This means yuan would have a higher demand. Therefore, lowering interest rates for bonds denominated in yuan.

• The Chinese exporters would have lower borrowing costs.

• The currency would work in the pricing of more international contracts. In this light, China exports a lot of commodities that traditionally priced in U.S. dollars. If the commodities were priced in yuan, China wouldn’t have to worry much about the dollar’s value.

• China would have more economic clout concerning the United States.

How China manages its Yuan value?

Historically, the Chinese pegged the yuan to a basket of different currencies filled mostly with the USD. The People’s Bank of China manually adjusts the yuan’s value to track that of the U.S dollar.
The USD’s value fluctuates because it’s on a floating exchange rate.

YuanTo attain this, the central bank should have enough foreign exchange reserves to control its currency’s value. Therefore, China’s exporters receive U.S dollars when they ship their goods to the United States of America. They do it by, depositing the USD into their local banks, which will transfer it to the central bank, in exchange for yuan.

In other words, when the bank requires to raise the yuan’s value relative to the dollar, the bank will use its dollar reserves to purchase yuan from Chinese banks. Hence, by taking yuan out of circulation, the bank upsurges the yuan’s value. If it replaces yuan with dollars, it will put more dollars into circulation and lowers its value. In this way, China influences the value of the U.S. dollar.

Why China Pegs its currency to the USD?

China, like many other countries, pegs its currency to the USD for two primary reasons.
Firstly, it is used mostly for international transactions. There are more than 65 other countries that either uses the dollar as their legal tender or peg their currency to the dollar. Therefore, the dollar has been the world’s reserve currency since the 1944 Bretton Woods Agreement.

Secondly, the yuan plays an essential role in keeping China’s economy competitive. As America is China’s largest trading partner, China manages its currency to control its export prices. In other words, it keeps them reasonably priced correlated to U.S. competitors. However, many countries would like to do this, but very few have China’s ability to manage it very well. Therefore, China’s command economy permits the communist party to control the central bank and critical businesses.

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