How China manipulates its currency

  • China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the yuan on the forex market
  • Fixed its exchange rate in 1995 at slightly more than 8 yuan to the US dollar and maintained that peg until July 2005, when it made a move toward liberalising its currency by introducing a narrow trading band. Over the past decade, the band has gradually widened, starting at +-0.3% and finally reaching +-2% in March 2014.
  • In August 2015, China allowed its currency to devalue outside the previous trading band.
  • In a statement, China’s government “henceforth the mid-point of an expanded 2% band within which the currency can move on any single day would be based on the previous day’s closing value”, also saying “demand and supply conditions in the foreign exchange markets and the movement of major currencies”
  • China has maintained strict rules for individuals and banks holding foreign currency: investors who exchange dollars or other foreign currency for yuan must sell them directly to China’s central bank, which incorporates them into the country’s foreign reserves.
  • China’s reserves as of Aug 2016 at 3.2 trillion
  • China has customarily used a portion of its reserves to influence the value of its currency through foreign exchange market interventions, mainly through selling and buying foreign currency reserves.
  • They do this by buying or selling currency through its interbank market, where the central bank, the Peoples Bank of China, maintains ‘designated foreign exchange banks’ to operate on its behalf for onshore spot market transactions
  • Large amount of reserves denominated in US dollars which are deemed safe haven for capital – US treasury bonds
  • TheCentral bank also uses derivate contracts to influence the market and value of currency; the advantage is that bank doesn’t have to sell dollar supplies immediately, which maintains market confidence in its ability to intervene in the future.
  • The Government has been suspected of occasionally using its automatic price matching system, which is a centralised computer system used to identify bids, to make tradeYuans on the extreme ends of market trading ranges.

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