• China’s central bank intervenes in the foreign exchange market
• Numerous possibilities of intervention
• China sits on huge currency reserves
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donald trump Since the Sino-US trade war broke out, the Chinese central bank has allowed the yuan renminbi (renminbi is the Chinese currency, the unit of the renminbi is yuan) to weaken somewhat. The US President at the time saw this as an attempt by China to make Chinese goods cheaper in the world and thus gain unfair competitive advantages in trade. “China has always used currency manipulation to steal our businesses and factories, damage our jobs, depress our workers’ wages and hurt our farmers’ prices,” Trump tweeted.
In fact, the People’s Bank of China (PBOC) can affect the exchange rate with its monetary policy actions. However, many countries around the world do the same, after all, stable, or at least not completely volatile, exchange rates make trade plannable in the first place. Such exchange rate management is therefore not to be equated with manipulation. But which means does the PBOC use in detail?
Exchange rate is fixed daily
The daily fixing is the central bank’s most obvious tool. The yuan renminbi was pegged to the US dollar for a long time, but this peg was removed in mid-2005. Now the People’s Bank of China sets an official exchange rate every morning at 9.15 a.m. Beijing time, around which the yuan renminbi is allowed to fluctuate within a narrow range. However, as soon as the deviation is greater than two percent, the Chinese monetary authorities intervene. As a result, there is still a peg to the US dollar, albeit more flexible.
When setting the official exchange rate, the currency watchdogs use various factors as a guide. These include, for example, the price development of the previous day and a currency basket, which includes the US dollar, the euro, the Japanese yen and the South Korean won.
Foreign exchange reserve requirement
Another instrument of the PBOC is the foreign exchange reserve ratio. This determines how much foreign currency banks must hold as reserves. In this way, the central bank can control the liquidity of foreign currencies within the banking system. For example, by lowering the minimum reserve requirements, the liquidity of dollars and the like can be increased and the yuan renminbi can be supported in return.
cash flow control
In addition to these instruments, China has other ways of influencing the exchange rate. This includes, for example, controlling the flow of capital into and out of the Middle Kingdom. By restricting capital outflows and encouraging capital inflows, the yuan renminbi can appreciate.
Informal actions of the PBOC
In addition to these public instruments, the PBOC has other, less transparent means of exerting influence. It can occasionally happen that central bank representatives influence the behavior of market participants through public statements.
In addition, the banking system in China is significantly less free than in western industrialized countries. For example, China’s authorities can secretly urge banks not to bet against the yuan renminbi in their proprietary transactions.
The importance of currency reserves
As a result of China’s export strength and constant interventions to maintain the desired exchange rate against the US dollar, China has accumulated enormous currency reserves – the largest in the world at more than three trillion US dollars. The US dollars collected are invested in American government bonds. If China were to sell such US government bonds on a large scale, this would also have a negative impact on the US dollar. However, this would then also significantly reduce the value of Chinese foreign exchange holdings. So it is that China and the United States are in mutual dependence.
Beijing has an interest in a stable US dollar and a healthy US economy simply out of concern for the security of its currency reserves. Ultimately, the question of whether China is actually a “currency manipulator” is about where exchange rate management ends and manipulation begins.
Editorial office finanzen.net
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