Question

In August of 2019, the Department of the Treasury officially declared China to be a Currency Manipulator.3 In particular, the Treasury Department determined that China manipulated the rate of exchange between the Chinese Yuan and the US Dollar for the purpose of gaining unfair competitive advantage in international trade. How would the Chinese government accomplish the goal of currency manipulation if it was seeking to gain an unfair competitive advantage as a US trading partner? Do you care if a China (or any other US trading partner) engages in currency manipulation? Why or why not?

Answer 1

Let us first understand how Chinese central bank keeps its currency (Yuan) value less against dollar. It is done by either selling or buying dollars as per the situation. Chinese currency should appreciated looking its positive trade balance. It has more exports to USA than imports.

As Chinese export more, dollar supply and Yuan demand should increase. Yuan shoukd appreciate and Dollar should depreciate. However, Chinese central bank buys dollars in these situations and sell sits own currency.

As shown in the figure below, dollar should depreciate from P1 to P2 due to more supply as imports are higher. But Chinese central bank by selling yuan and buying dollars, shifts demand D1 to D2 and again P1 is maintained.

If in case Yuan depreciates then Chinese bank will sell dollars to bring Yuan on previuos levels.