Chinese Currency Manipulation

The Chinese government have been criticised for the ‘manipulation’ of their currency. They would prefer not to use the word ‘manipulation’ perhaps they have an unofficial exchange rate target to keep Chinese currency undervalued to promote growth and exports. At the moment China only pegs its currency against the dollar and not a wider basket of currencies.When the UK was in the Exchange Rate Mechanism, we were trying to target a semi-fixed exchange rate. Though in 1992, we had to work hard to keep the Pound above its market value, whereas the Chinese are working to keep it lower.

Q. What does it Mean that the Chinese Currency is Undervalued?

An undervalued currency suggests that agents (i.e. Government) are keeping the currency below it’s ‘fair’ market equilibrium price by currency controls and intervention buying.

Many analysts argue that in a free market, the Chinese Yuan would appreciate because of the strong demand for Chinese goods and the large Chinese Current Account Surplus. However, the Chinese government is trying to prevent the currency rising. Essentially, the Chinese Central Bank is buying Dollar assets which increase the value of the US dollar relative to the Chinese currency.

This policy of buying foreign assets has led China to accumulate $2.4 trillion of foreign currency reserves. (China’s Foreign Currency Reserves)

Why is China Pursuing this Policy?

China is pursuing a policy of reducing the value of its currency to try and boost growth, especially in its key exporting industries. Chinese growth is very high by western standards. However, China needs a high rate of growth to absorb labour that is made unemployed from the agricultural sector. Because China doesn’t have much in the way of social welfare payments, it is concerned that without job creation in the manufacturing sector they could face high unemployment and social unrest. Therefore, keeping a weak currency helps to boost demand for Chinese exports and therefore Chinese jobs.

Why is US Unhappy at Situation?

By keeping the dollar strong, US exports become less competitive. Also by keeping the dollar strong to the Chinese Yuan, it makes Chinese imports relatively more attractive, increasing foreign demand at the expense of domestic producers. The US argues this loss of Demand and jobs is something it can’t afford at its particular stage in the economic cycle.

Large current account surplus is an indication that China’s currency is undervalued. Though this current account surplus has been decreasing in recent years.


27 thoughts on “Chinese Currency Manipulation”

  1. Would it be more accurate to say China is manipulating the US dollar rather than the manipulating yuan?

    Is the yuan only seen as undervalued when compared to the US dollar? Or is it also low when compared to the Euro? Or pound sterling?

    I don’t understand how currency controls, such as limiting the amount of currency Chinese nationals can
    take out, weakens the yuan. I thought this would have the opposite effect.

    Nor do I understand how they can weaken their currency through government intervention, if they are not intervening.

    Is it only US that is complaining about the value of the yuan? And would this have something to do with chinese loans to US and the cost to US of repaying the loans? Are the chinese loans calculated in yuan or dollars? Is China lending US the dollars it has previously bought up?

    I’m realising the extent of my ignorance in this matter.

  2. >Would it be more accurate to say China is manipulating the US dollar rather than the manipulating yuan?

    By buying dollar assets they are affecting both the value of the Yuan and Dollar.

    > Is the yuan only seen as undervalued when compared to the US dollar? Or is it also low when compared to the Euro? Or pound sterling?

    Not sure, most focus seems to be on value against dollar

    >I don’t understand how currency controls, such as limiting the amount of currency Chinese nationals can
    take out, weakens the yuan. I thought this would have the opposite effect.

    Yes. The weakening of the Yuan is due to intervention buying of dollar assets not currency controls.

    See also
    China Currency Reserves Questions

  3. Good post on an important topic. There is more to the story, too. In particular, there is a downside to currency manipulation from the Chinese point of view. Namely, their attempt to keep their exchange rate undervalued have the indirect effect of creating inflationary pressure, now starting to become a worry. For more on the relationship between currency manipulation and inflation, check out this post:

  4. “An undervalued currency suggests that agents (i.e. Government) are keeping the currency below it’s ‘fair’ market equilibrium price by currency controls and intervention buying.”

    But, as you have kindly answered elsewhere, China is not manipulating its own currency; it is buying US bonds/treasury securities because it has surplus cash. And, as you have also answered, its strict currency controls have the effect of applying upward pressure on the yuan. If it wanted to depress the yuan, it could relax the currency controls.

    If China’s ulterior motive is exports, it would make sense for China to buy the rupee to make exports from Indian more expensive. But I understand that India, Brazil and Japan sell their currencies when needed to counter upward pressure from time to time. That would warrant a charge of currency manipulation. The accusation of selling its own currrency doesn’t seem to be made against China.

    The charge that China is manipulating its own currency would seem then to be a US obsession. If China didn’t buy US bonds, someone else would. And if some of the bonds US remained unsold, US would have to raise the interest rates it pays on bonds. I presume that US doesn’t want to pay higher interest rates – otherwise what’s the point of an AAA rating? Besides, US economy is so dependant on Chinese products and components, which it could never hope to produce at such a low cost itself, that a stronger yuan would simply make the components more expensive, this pushing up US selling prices (or reducing profit).

    I’m starting to conclude that US is blaming China, unjustifiably, for its current predicament. Why is US having to borrow so much? Where did the economic crisis start?

  5. We don’t hear China complaining – or other countries for that matter – that US, and to a lesser extent UK, caused the world economic crisis.

    Perhaps they are critical – but it doesn’t get reported in western media!

  6. A further thought: the Q.Easing tactic that US and UK employ, which doesn’t seem to happen in the eurozone, presumably has the effect of weakening the USdollar and UKpound. It seems the charge of ‘manipulating their own currency’ to keep it artificially low could be made against UK and US.

  7. My comments below probably offer no intelligence in what the US should do to tackle their economy problem but instead some form of morale judgement to the human race in general, so no particular critisism on the american as a whole.

    Being an Asian, my values are obviously different from the West, nevertheless I lived in Europe and UK for over 10 years and so I am not exactly ignorant about their culture and thinking.

    I just felt that the way US constant criticism on China for their unfair practice on manupulating its own currency in order to gain competitive advantage thus causes US loss of job was simply a political excuses. The US should know that they have gamble too much and over taken advantage in their past with leveraging their purchasing power for their own gains.

    Here’s the analogy of how I would describe the situation between US & China.

    US buying behavior and credit extention is comparable to a rich kid who enjoy buying toys and candies from a old poor man (ie. China of the past) who has a family to support. The old man is really grateful and work hard but do not know better how to charge the right fees for his work and products and so the rich kid continue to enjoy his life style and live happily but not ever-after.

    One day the old man past away and his son take over the business and continue to sell all sort of goodies to the rich kid. The chinaman’s son who were forturnate enough were better educated than his father and are able to figure out how to sell more to the US kid in an effort to continue to improve his living standard and so he also dare to have an ambition to aspire for his son also to continue to improve his future and be able to stay away from proverty for good. (especially knowing that once upon a time his great, great grand father were not only well educated and respected by all neighbour but had plenty of wealth to make the family proud but not until the generation later his grandfather was robbed of all wealth due to his own complacency).

    One day the rich US kids were being scolded by his parent for he has been found taken out so much money from home that now the family are facing financial trouble. The parent warn the son that either he sort out the problem and return the money or he will be kick out of the house for good and learn to look after himself.

    The rich US kid obviously was shock to learn of the consequences and immediately felt that he needed to deny the responsibility or at least not all of it, so the only way he figured to do so is to appear to be victimize and play innoncence.

    He made up a great story and had his whole family, friends and neighbour to believe that a cunning chinaman have cheated his son and fool him in stealing the family fortune by selling him too much unncessary stuff and in some way has caused his son to become an shopping addict which explain his purchasing behavior.

    The chinaman who were more fortunate with more education than his father obviously felt he cannot accept the lies coming from this US kids and are reluctant to give in to accept the blame and so the tension continue, with the parents and all the neighbour threated to retailate and have the chinese kid expel of the country if he doesn’t return the money.

    American is very proud of George Washington because of his honesty right from the beginning when he was only a little kid where he admitted to his father for being responsible for chopping his favorite cherry tree.

    Now the US are a great nation who has been holding up high morole standard in the name of humanity and were positively influencing the rest of the world form many years and were out there preaching what is right and wrong.

    So here’s my question? What would the parent do if he eventually find out that it was his son who was at fault and not all blame deservely go to the chinese. Would the parent have the courage to continue with the american heritage of accepting the truth and begin to work harder to find ways to solve their own problem.

    In the name of democracy, it should also come fairness and hopefully the US will soon have the courage to focus on dealing with the problem and not constantly finding excuses. The poor chinaman had just started his journey to enjoying a better life and future, so do not expect that he will accept dropping down his own dream in order to realize other’s dream.

    But having being educated in the west for over 10 years, I personally have always admired the quality and humanity standard that the west have established. Unforturnately money is really an ugly thing and had once again proven that some morale standard can only be as high as the wealth they own.

    So I hope the US can and are willing to find partners to work things out and not pointing fingers to others to save themselve, in the long run they can’t win the battle but perhaps prolonging their own suffering.

    No more cold war mentality please, too many people blogging in other website to find china as a scapegoat for their own face saving. The world is big enough to accomodate all of us as long as we continue to preach fairness, honesty and help each other out with a long term perspective. That’s why there’s book written out there called “the world is flat” this is really the presence and as well the future. So let’s save ourselves from destroying our future.

  8. There is a technical error here:-

    China is not actively buying any US asset. The USD2.8trn worth of foreign reserve is the cumulative trade surplus. It is a result of a closed capital account.

    What happens when Walmart buys from its China supplier under the closed capital account?

    1 – Walmart pays USD to a bank in China.
    2 – Bank reconcile the trade with China supplier and pays RMB to China supplier (i.e. printing more RMB).
    3 – Net net, becoz Walmart cannot settles its trade in RMB (i.e. cannot own RMB outside of China), China ended up with an accumulation of USD on one hand and on the other keeps printing RMB, which doesn’t “flow” outside of the Chinese border.
    4 – Liquidity both outside of and within the Chinese border increases.

    Note that this is NOT Chinese govt actively buying USD. VERY DIFFERENT!!!

  9. OK – Walmart pays USD to chinese who pays in RMB to Chinese supplier. Presume chinese bank presents USD to US Treasury and converts to government bonds/bills.

    Question to anyone:

    When the bonds/bills mature, how does chinese bank get paid?


    My expertise in global economics and finance tell me there is no trade surplus when a currency is free. The currency will move in the direction that makes it economically unfeasible to export for a country that has a trade surplus, until the trade surplus is eliminated.

    The Chinese Government is effectively, for all intent and purposes, printing money in their currency to buy US Dollars to stop the currency from moving. The affect of this is to provide a large amount of $US money owned by the Chinese Government, $2.5 Trillion to quote one source, that the Chinese Government is now using to buy US companies and US real estate.

    We let Japan do it until we forced them to let their currency adjust. After which the Japanese auto manufacturers moved jobs to the US.

    Now we let China manipulate their currency to the US Dollar. This has crushed manufacturing in the US. Gone for good is that manufacturing know how. This is a direct threat to US National Security if we can not manufacture anything. The inner cities have no manufacturing jobs, no opportunities. They have all gone to China

    Pearl Harbor II – this time from China printing money to buy US dollars to manipulate their currency to buy Treasuries and now US companies!

    China will own large portions of the US. Please help America.

  11. “American is very proud of George Washington because of his honesty right from the beginning when he was only a little kid where he admitted to his father for being responsible for chopping his favorite cherry tree.”

    That’s a complete and de-bunked myth about Washington made up by propagandists not unlike those in China and the US today. Your analogy has some merit but it struggles to make a point so much it glosses over that fact that China is not innocent in this scheme at all. China is a controlled economy with most large firms owned by the government.

  12. That’s right. Everytime there is a bigger competitor, be it military, financial, economic, or real estate power, America threatens war. How can you all argue about China being unfair or manipulating their currency, when some of you are already starting to talk about yet another war. Some of you Amercians are so thick, and THAT is why you’re in this mess. You have so many of your troops in Afghanistan, then sent more to Iraq, yet you’re talking about threatening war with Iran, and now even China? And then you think China is the cause of all your financial woes? Wake up and see your own damn fault. You idiots are the reason why there is a global recession. Fools. You moan about China being unfair, but you just can’t stand the fact that your days as a world power financially and militarily are numbered. Every civilisation and people has it’s era, and yours is fading, and you can’t take it, and when your financial, business, economic, and intellectual prowess isn’t enough to oust your competitors, then you keep them at bay through war. All international laws and all honesty and fairness only ever applies as long as it doesn’t harm your own interests. You hypocrites. Mark my words, you will go down irrespectively, goes history states that all of the most powerful empires and civilisations did! ”A direct matter of national security…” how the hell do you work that one out? You conjure words and apply them as you see fit. Deal with these things in a diplomatic way, because financial and economic crises aren’t problems that are wisely dealt with on a battlefield. God, even Russia when it collapsed as a world power was much more elegant and dignified about it.

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