Currency manipulation - by China or any other other country - is seen to flout global trading rules by conferring unfair competitive advantages.
A country does so by artificially inflating or deflating its exchange rate. It may be designed to make exports more competitive, to avoid inflation or reduce capital inflows.
A paper by Laurence Howard in the Emory Law Review said currency manipulation has "serious effects on the global market". Capital Economics now expects the yuan to end the year at 7.
US officially labels China 'currency manipulator'. How worrying is China's slowdown? US-China trade war: 'We're all paying for this'. Image source, Getty Images. Tariffs backfiring on US, says ex-Trump adviser. How does China devalue its currency? What is the impact of a weaker yuan? Have they done this before? Image source, AFP. In late , China unveiled a new trade-weighted CFETS yuan index, saying the yuan's value should better reflect its trade and investment with multiple countries, not just the United States.
Since , the number of the currencies in the basket is 24 and the dollar's weight is Analysts say keeping the CFETS index rangebound will ensure China isn't disadvantaged on exchange rates versus its trading partners.
Many analysts suspect Beijing is comfortable with the CFETS index swinging between 92 and 98, which makes the currency not too weak relative to partners. China's central bank rarely intervenes directly in foreign exchange markets, but usually operates through state-owned banks, in addition to using money market operations and its hefty foreign exchange reserves. The PBOC is also believed to influence offshore markets in various ways, including scheduled and off-cycle sales of yuan-denominated bills in Hong Kong, which traders say can soak up liquidity and stem speculative short-selling of the currency.
It has shored up restrictions on capital outflows since then, while encouraging more inflows from foreign investors into Chinese stocks and bonds. Based on the real effective exchange rate REER , which measures a currency's value weighted against those of its major trading partners after adjusting for inflation, the yuan is close to if not slightly stronger than its long-run average. Annual data shows that in the yuan's REER was only a tad below average during the past four years, according to the Bank of International Settlements.
In comparison, the dollar's REER was Nifty 17, Honeywell 45, Market Watch. ET NOW. Brand Solutions. Video series featuring innovators. ET Financial Inclusion Summit. Malaria Mukt Bharat. Wealth Wise Series How they can help in wealth creation. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance.
Develop and improve products. List of Partners vendors. The first devaluation marked the most significant single drop in 20 years. The move was unexpected, and many believed it was a desperate attempt by China to boost exports in support of an economy that was growing at its slowest rate in decades.
However, the PBOC claimed that the devaluation was part of its reforms to move toward a more market-oriented economy. The move had substantial repercussions worldwide. After a decade of steady appreciation against the U. However, many speculators in foreign exchange forex markets use a high amount of leverage.
Automatic stop-loss orders are one of the best ways for leveraged forex traders to protect themselves from sudden policy changes. Stock markets in the U. Most currencies also reeled. Some argued that the move signaled an attempt to make exports look more attractive, even as the Chinese economy's expansion slowed.
However, the PBOC indicated that other factors motivated the devaluation. That made the POBC's claim that the devaluation's purpose was to allow the market to be more instrumental in determining the yuan's value more believable. The devaluation announcement came with official statements from the PBOC that as a result of this "one-off depreciation," the "yuan's central parity rate will align more closely with the previous day's closing spot rates.
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.
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