Question

Most all people unwittingly purchase many imported goods. It might be an interesting exercise to check your recent purchases to see how many items include a “Made in China” tag. The U.S. has long criticized Beijing’s policymakers of keeping the Yuan (Chinese currency) artificially cheap to give Chinese exports an unfair advantage in global markets. Explain how China has been able to devalue their currency, the more specific the better.

Answer 1

China maintains strict control over the Yuan. It also maintains a strict control over the banking system and the flow of money in and out of China. Earlier the Yuan was fixed against the US dollar. However now it has the characteristics of a floating currency. As per the rules of the country the investors who exchange foreign currency foreign are required to sell them directly to the central bank of China. China uses a portion of a huge dollar Reserves to devalue Yuan through foreign exchange interventions. It uses the yuan to buy foreign currency which results in devaluation of the currency. The central bank of China also purchases derivative instruments to influence the value of Yuan. Large amount of purchase of foreign currency instruments increases the supply of Yuan in the market which devalues it